We list the major tax incentives in China to encourage technology innovation and share guidance on how to tap benefits listed in various preferential policies
As China endeavors to shift from being a low-end mass manufacturer to a high-end producer, the government has doubled down on encouraging targeted investments in research and development (R&D) and technological innovation. The ongoing technology confrontation with the US is another factor at play, impacting a wide range of segments from access to chips and other key input technologies and products. This has resulted in China labeling its technology sector as a strategic one and for which government support has increased.
In this article, we summarize the major tax incentives to encourage technology innovation and share our experience on accessing the benefits of the preferential policies.
High and new technology enterprises (HNTEs)
HNTE treatment, which reduces a qualified taxpayer’s applicable corporate income tax (CIT) rate from the standard 25 percent to 15 percent, is one of China’s core tax incentives that encourage innovation.
Besides the lower CIT rate, starting from January 1, 2018, an additional preferential tax treatment has been granted to HNTE:
- Losses of qualified HNTE that occur five years prior to 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. For normal enterprises, the maximum carry-forward period for losses is only five years.
Upon obtaining the qualification as an HNTE, the enterprise shall enjoy the HNTE treatment starting from the year when the HNTE certificate is issued.
Qualification and criteria
To qualify for HNTE status, a company must meet all of the following criteria:
- Be registered in China (not including Hong Kong, Macao, and Taiwan) for at least one ;
- Owns the intellectual property (IP) right for the core technology of its key products or services (services ) through independent R&D, transfer, donation, merger and acquisition
- 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
- 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
- The enterprise’s innovation capacity evaluation satisfies the corresponding
- 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, the applicants need to go through an application process by submitting required documents and passing the corresponding assessments.
The bureau in charge of the application is an administrative authority for accreditation of HNTE (hereinafter, 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. The provincial-level HNTE accreditation authority is led by the Leading Team for Administration of Accreditation of HNTE Nationwide (hereinafter, the National HNTE Leading Team).
Step 1: Self-assessment and application by the enterprises
If an enterprise satisfies the HNTE criteria upon self-assessment, it should register on the “Network for Administration of Accreditation of HNTE” (http://www.innocom.gov.cn) and submit an application for accreditation to the authority in charge. At the same time, the applicants should submit required documents that demonstrate their qualifications, such as materials related to IP, statements on the enterprise’s employee and technical personnel, financial accounting reports from the past three years, among others.
Step 2: Expert assessment
The HNTE accreditation authority shall randomly select experts who satisfy the evaluation requirements to form an expert panel. The expert panel shall evaluate the declaration materials of the enterprise and form an evaluation opinion.
Step 3: Review and public comments
The HNTE accreditation authority shall examine the applicants and take into account the evaluation opinion of the expert panel, issue an accreditation opinion and submit to the National HNTE Leading Team office. A public announcement of accredited HNTEs shall be placed on the Network for Administration of Accreditation of HNTE for 10 working days.
Step 4: Accreditation and certification
If no objection is raised, the HNTE list shall be filed and announced on the Network for Administration of Accreditation of HNTE, and a standardized HNTE Certificate shall be issued to the enterprises. Where there is any objection, the accreditation authority shall verify and handle it.
The whole turnaround is around 60 working days if everything is in order.
The qualifications of an accredited HNTE shall be valid for three years from the date of issuance of the HNTE Certificate.
Source: China Briefing