On January 29, 2016, the Chinese tax authority announced the amended administrative approval measures (Guokefahuo, 2016-32) for High and New Technology Enterprises (HNTE) to get Research and Development (R&D) tax benefits in China. The amended code has implemented key changes, simplifying both the process and the qualifications needed to claim R&D tax benefits; allowing greater tax advantages for small to medium sized companies, and providing new tax benefits to foreign owned subsidiaries in China.
Companies must be recognized as a HNTE in order to claim R&D tax benefits. HNTE generally falls within one of the following technology areas, including but not limited to:
- Electronic information
- Biological and new pharmaceutical
- Aviation and aerospace
- New material technology
- High technology service industry
- New energy and energy conservation
- Resources and environmental technologies
- Innovation for high and new technology in traditional industries
To apply for HNTE status, the applicant company must register on the HNTE company assessment and administrative website and submit an application with all supporting documents. The HNTE Assessment Committee will review and evaluate the submitted documents. The committee will then issue its draft decision notice on the website for public comments for 10 business days. If no objection is received from the public within that time frame, the tax authority will issue the official HNTE certificate to the company.
To be eligible, a company must be a Chinese tax resident for more than one year, own the intellectual property in core technologies, meet R&D personnel and expense requirements, and generate sufficient profits from HNTE products and services.
Key changes included in the amended administrative measures
Research and development expenditures— For companies with under RMB 50 million in annual sales, the R&D cost weight ratio (R&D cost/total cost) has been reduced from 6% to 5%. The ratios remain unchanged at 4% for companies with annual sales between RMB50 million and 200 million, and 3% for companies with annual sales of more than RMB200 million. This decrease in cost weight ratio for companies under RMB 50 million indicates that the government has made tax advantages more broadly available to support small to medium size companies.
Employee education background— The requirement stating that at least 30% of employees must have an associates degree, was removed from the tax code. Due to the high demand for R&D engineers in China, many companies are facing the challenge of finding staff. The new tax code helps companies meet the employees’ educational background requirement.
Intellectual property— The new tax code has also refined the intellectual property ownership rules, stating that companies shall obtain the ownership of the intellectual property through self-research and development, grants, donations, or through a merger or acquisition. The new rules removed the need for an exclusive contract and directed companies to focus more on self-research.
Expanded area—New areas have been added to the industry catalogue to qualify companies as HNTE, including cloud computing technology, mobile Internet, cultural and creative technology, e-commerce and logistics. The added areas allow more companies the opportunity to utilize R&D tax benefits.
Simplifying the assessment process— The new processes reduce the public post days from 15 to 10. The government will establish a random selection system to examine HNTEs, and companies can renew their status online by May of each year. Companies are required to report prior year’s HNTE status information to the tax authority by the end of May the following year. These reports should include intellectual property rights, scientific and technological personnel, R&D costs and gross sales.
R&D tax benefits for foreign owned subsidiaries in China
Corporate Income Tax (CIT) rate reduction— Companies meeting HNTE status can reduce their corporate income tax rate from 25% to 15%.
150% deduction— The China tax authority offers a 150% tax deduction for eligible R&D expenditures for CIT purposes. For example, if a company spends RMB100 in R&D cost, in addition to RMB100 tax deduction, it can take an additional RMB 50 tax deduction.
CIT exemption on profits from the transfer of qualified technology— If a company meets HNTE status, and has an annual profit less than RMB 5 million, it is exempt from CIT when transferring ownership of intellectual property. Any portion beyond RMB 5 million is eligible for a 50% CIT reduction.
Other miscellaneous tax benefits— The new tax code also offers various benefits including accelerated depreciation for qualified fixed assets, employee housing support, land use priority and other benefits from local governments.