In order to achieve its ambition of becoming a leading economic power in the world, China has identified High and New Technology Enterprises (HNTEs) as a vital link to reach this goal. Therefore, China has set tax incentives on the high-tech industry as one of its core policies.
The Chinese government is encouraging targeted investments in research and development (R&D) and technological innovation, through a series of various tax benefits including tax exemption, super deductions, and extension of the loss-carryover period for HNTEs as well as TSMEs.
The trade tensions between the United States and China, which affected many sectors including technology, have also been a significant motive for the Chinese government to support the development in its own high-tech industry.
These are some of the major tax incentives to encourage technology innovation, and how to access the benefits of the preferential policies.
Reduced corporate income tax (CIT) rate of 15 percent (previously 25 percent)
Tax reduction or exemption on income from technology transfer
10 years as maximum loss-carryover period (previously 5 years)
175 percent super deduction of R&D expenses (previously 150 percent)
In May 2019, the STA and the Ministry of Finance jointly announced the reduction of CIT for integrated circuit (IC) design and software companies by 50 percent.
Announcement 68 stated a two-year exemption and three-year reduction incentive where CIT exemption applies for two years, while the following three years will be 50 percent.
Upon obtaining the qualification as an HNTE, the enterprise enjoys this treatment starting from the year when the HNTE certificate is issued.
The following criteria must be met to be granted HNTE status:
Be registered in China (not including Hong Kong, Macao, and Taiwan) for at least one year.
Owns the intellectual property (IP) right for the core technology of its key products or services through independent R&D, transfer, donation, merger and acquisition, etc.
The core technology of the enterprise’s key products (services) falls within the scope of the areas outlined in the Regions of Advanced Technologies Strongly Supported by the State, which covers more than 200 categories of technologies, products, and services in eight large technological areas.
The enterprise’s technical personnel engaging in R&D and relevant technological innovation activities constitute more than 10 percent of the total number of employees in the current year.
In the last three financial years (the actual operational period for newly established ones), R&D expenditure should account for a certain percentage of the enterprise’s total sales revenue in the same period:
No less than five percent if the latest annual sales revenue is below RMB 50 million (inclusive, approx. US$7.7 million);
No less than four percent if the latest annual sales revenue is below between RMB 50 million (approx. US$7.7 million) and RMB 200 million (inclusive, approx. US$30.8 million); and
No less than three percent if the latest annual sales income is upwards of RMB 200 million (approx. US$30.8 million).
R&D expenditure within China is not less than 60 percent of the total R&D expenses.
The ratio of income from high-tech related operations against total income is not lower than 60 percent in the current period.
The enterprise’s innovation capacity evaluation satisfies the corresponding requirements.
The enterprise has no record of major safety or quality incidents or serious environmental violations during the year preceding the application.
To be certified as HNTEs, applicants must submit required documents to the office of the administrative authority for accreditation of HNTE (the HNTE accreditation authority) formed by the provincial-level science and technology administration and management authority, together with the provincial level finance and tax authorities.
If an enterprise satisfies the HNTE criteria, it should register on the “Network for Administration of Accreditation of HNTE” (http://www.innocom.dov.cn) and submit an application for accreditation to the authority in charge.
The qualifications of an accredited HNTE are valid for three years from the date of issuance of the HNTE Certificate.
Upon accreditation as an HNTE, the enterprise shall submit information on its IP, technical personnel, R&D expenses, operating income, etc. of the preceding year through the Network for Administration of Accreditation of HNTE before May 31 every year.
Technology based small and medium sized enterprises (TSMEs)
A TSME is a SME that conducts technology-based activities, with scientific and technological personnel who are involved in R&D and obtain IP for creating high-tech products or services.
Being qualified as a TSME, the losses of the enterprise occurred five years before the year in which they become qualified and have not been made up shall be allowed to be carried forward to subsequent years to be made up, and the maximum carry-forward period is up to 10 years. Besides, local governments may treat TSMEs as HNTE candidates and provide other incentives to support their growth.
Different from the HNTE qualification, the TSME status has special requirements on number of total employees, annual sales revenue amount, and total assets.
To qualify, a company must:
Be registered in China (excluding Hong Kong, Macao, and Taiwan).
The total number of its employees shall be no more than 500, and either its annual sales income or its total asset amount shall be no more than RMB 200 million (approx. US$30.8 million).
The products and services provided by it are not included in the prohibited, restricted, or eliminated categories prescribed by the State.
There is no occurrence of major safety or major quality accidents and serious violation of environmental law or serious dishonesty in scientific research in the previous year of filling and the present year, and it is not included in the list of enterprises with abnormal operations or the list of enterprises with serious dishonest behaviors in violations of the law.
Its comprehensive evaluation score is not less than 60 points in terms of the evaluation indicators for TSMEs, with the score on scientific and technical staff indicator more than 0 point.
The evaluation indicators for TSMEs include such categories as scientific and technical staff, R&D investment, as well as scientific and technological achievement, with a total score of 100.
Certain enterprises could be exempted from the scoring requirements, including:
Enterprise that holds an HNTE certificate that has not expired yet.
Enterprise that has won a state-level science and technology award within the past five years and ranked in the top three.
Enterprise that has a recognized R&D body at provincial or ministerial level or above.
Enterprise has taken the lead in the development of international standards, national standards, or industry standards within the past five years.
Enterprises must fill in the information on the “National Information Service Platform for TSMEs” (http://www.innofund.gov.cn/, the TSME Service Platform).
The enterprises that have been included in the database must update their information through the TMSE Service Platform by the end of March each year.
Advanced technology service enterprises (ATSEs)
Originally launched nationwide in 2017, ATSE status is an additional innovation tax policy in China to encourage the provision of information technology outsourcing (ITO), business process outsourcing (BPO), or knowledge process outsourcing (KPO) services to overseas entities.
The ATSE status enjoys a reduced CIT rate of 15 percent, from the standard 25. Besides, ATSEs are subject to zero value added tax (VAT) rate for the provision of certain offshore services.
The education and training expenses of ATSE’s personnel can be deducted from their taxable income for a maximum of 8 percent. As of 2019, this incentive was extended to all other industries besides high tech.
To qualify, a company must:
Be registered in China (excluding Hong Kong, Macao, and Taiwan).
Be engaged in one or more categories of advanced technology service businesses listed in the Scopes of Recognized Advanced Technology Service Businesses (for Trial Implementation, hereinafter, the Scope) and adopt advanced technologies or has strong research and development capabilities.
More than 50 percent of its staff hold a college degree or above.
More than 50 percent of its total revenue at the current year come from the revenue generated from the advanced technology service businesses listed in the Scope.
Revenue generated from offshore service outsourcing business is not less than 35 percent of total revenue at the current year.
Enterprises can apply to the department of science and technology at the provincial level and submit the necessary documents.
The department of science and technology at the provincial level shall, jointly with the departments of commerce, finance, taxation, and commissions of development and reform at the same level, carry out a review and then issue official documents of recognition, and file the list of the recognized ATSE through the ATSE Platform (http://innocom.gov.cn/).
The ATSE status is valid for three years. Companies are required to submit the “Enterprise Information of the Previous Year” and “Annual Enterprise Statistic” through the ATSE Platform before the end of March every year.
Super deduction on R&D expenditure
Incentivizing the R&D industry is China’s main thrust toward becoming an innovation powerhouse and attracting technological investments. With this in mind, China allows for the super deduction of the enterprise’s R&D expenses.
When calculating the CIT taxable income, while the cost is usually 100 percent deductible and the expenses, such as employee education and advertising, are subject to a deduction cap, the expense actually incurred by an enterprise in R&D activities enjoys certain preferential policies:
For manufacturing enterprises (except tobacco manufacturing), starting from January 1, 2021, if the R&D expenses do not form intangible assets and are included in the current profits and losses, on the basis of actual deduction, an additional 100 percent of such R&D expenses could be deducted from the taxable income amount; if the R&D expenses have formed intangible assets, they can be amortized before CIT at 200 percent of the actual cost of intangible assets.
For other enterprises (except tobacco manufacturing, lodging and catering, wholesale and retail, real estate, leasing and commercial services, and entertainment), during the period between January 1, 2018 and December 31, 2023, if the R&D expenses do not form intangible assets and are included into the current profits and losses, on the basis of actual deduction, an additional 75 percent of such R&D expenses could be deducted from the taxable income amount; if the R&D expenses have formed intangible assets, they can be amortized before CIT at 175 percent of the actual cost of intangible assets.
Manufacturing enterprises are those whose main business is in the manufacturing industry and whose income accounts for more than 50 percent of the total income in the year of enjoying preferential treatment.
For expenses incurred in R&D activities entrusted by enterprises to external institutions or individuals within China, 80 percent of the actual amount shall be included in the entrusting party’s R&D expenses and allowed for the additional deduction, and the entrusting party shall not make further additional deduction.
For expenses incurred in R&D activities entrusted by enterprises to external institutions (exclude individuals) outside China, 80 percent of the actual expenses shall be itemized as the entrusting party’s commissioned overseas R&D expenses. The commissioned overseas R&D expenses, to the extent of two-thirds of the domestic R&D expenses, are eligible for the pre-tax additional deduction.
When making a tax payment, companies can access this benefit by self-evaluating if they are qualified and retain relevant documents for future potential inspection of the tax bureau for 10 years.
There are other preferential tax policies to encourage the development of the tech sector, such as the tax incentives to the integrated circuit and software sector, the timelier refund of the VAT incremental credit balance to advanced manufacturing taxpayers, etc.
Business regulations in China tend to be complicated and change on a regular basis. Companies interested in these tax benefits should be well informed and seek expert assistance if necessary.