Tax Incentives for High & New Technology Industries in China further enhanced and clarified
Under the China Enterprise Income Tax (“EIT”) Law, a resident enterprise may enjoy Research & Development (“R&D”) super deduction incentive, i.e. deduct 150% of qualifying R&D expenses actually incurred in computing its tax liability, if the expenses do not result in the creation of an intangible asset. If intangible asset is developed, the qualifying R&D expenses should be capitalized and amortized based on 150% of the actual qualifying R&D costs. Recently, various Chinese authorities jointly issued a circular to further extend the foregoing super deduction percentage from 150% to 175%, which is available to Small- and Medium-sized Science & Technology Enterprises (“SMSTE”) when computing their EIT liabilities for the period from 1 January 2017 to 31 December 2019. The additional deduction effectively lowers the taxable income of the SMSTE. Self-evaluation and voluntary reporting requirements have to be complied with by the SMSTE in order to enjoy the tax incentive.
Also, under the China EIT Law, a recognized High & New Technology Enterprise (“HNTE”) can enjoy a 15% preferential EIT rate in China (rather than the standard rate of 25%). All recognized HNTEs must submit the following documentation by the end of May each year to enjoy the 15% preferential tax rate:
- HNTE development report for the previous year;
- Designated filing form for EIT incentive; and
- HNTE certificate and any other documents required by the tax authorities.
HNTEs must maintain documentation substantiating that the technologies that perform a core supportive role for its main products (or services) fall within the scope of the Key High and New Technology Sectors Supported by the Chinese government. HNTEs must also maintain documents detailing R&D expense management, as well as a breakdown of R&D expenses incurred. Documentation relating to the R&D expenses must be kept for the current year and the two prior accounting years.