China’s new trend towards R&D and the tax incentives it has implemented

By Richard Hoffmann, ECOVIS Beijing China

In China there has been a new trend towards Research and development (R&D) and the Chinese government has implemented tax incentives to encourage this trend.

Over the last few decades China has been a low-labour cost hot-spot and has attracted investors from all over the world. Asia has come to be seen as the engine of the global economy. Recently however, China has started to face increasing competition for foreign investment from the emerging economies of its neighbours like India or Vietnam. This has been due to the fact that China’s domestic costs for labour, raw materials etc. have risen.

Public authorities have tried to adopt commercial strategies in order to find effective counter-measures to raise revenue by reducing tax burdens or granting tax benefits. Increasing intellectual property assets has been one of those measures. Research and development R&D incentives reflect the Chinese economy’s gradual shift away from manufacturing towards innovation and development of intellectual know-how.

China’s R&D tax policies

China takes a multi-faceted approach to R&D tax incentives. A good understanding of those measures can lead to significant tax savings and benefits. The R&D tax policy generally includes:

1. A reduced corporate income tax (CIT) of 15% for high and new technology enterprises (HNTE), instead of the general 25%rate
2. A 150% super deduction for qualifying R&D expenses
3. Customs duty (CD) and Value Added Tax exemptions for purchases of R&D equipment
4. A tax concession for Advanced Technology Service Enterprises (ATSE)
5. A tax concession on technology transfer

 HNTE requirements

In order to receive a HNTE status it is important to meet the criteria of HNTE enterprise and to go through the HNTE application procedure of the Science and Technology Committee (STC).The following requirements must be fulfilled:

1. The Company must be registered in China
2. It must own the IP that comprises the key technology of the products.
3. It must have “sufficient” R&D (more than 10%) and science and technology (more than 30%) personnel
4. It must actually perform R&D and incur R&D expenses
5. It must generate at least 60% of its profit from high and new technology products
6. Its products/services must fit into one of the eight HNT areas

 Super deduction

R&D activities aim for the creation of new knowledge or new/improved materials, products, devices etc. The super deduction allows qualifying companies to deduct 150% of qualified R&D expenses, if the expenses don’t result in the production of an intangible asset (patent, software, etc.) and it allows companies to capitalize 150% of R&D expenses that constitute the cost of developing the intangible asset. It should be noted, that the R&D super deduction is available to all enterprises, not just HNTE.

The new Chinese R&D tax incentives are much more generous than in many other countries. Germany for example does not have any R&D tax incentives but provides a direct subsidy system to spur innovation.