In August of 2022, China’s Ministry of Science and Technology (MST), together with the Ministry of Finance (MOF) released Notice 220, an action plan for the incentivizing of technological innovation during the coming year. One key action item is to promote inclusive tax policies, such as weighted deduction of research and development expenses, tax incentives for High-Tech enterprises, tax incentives for technological business start-up incubators, and tax incentives for technology transactions.
A second focus is to provide a mechanism for enterprises to regularly participate in national scientific and technological innovation decision-making, as well as to provide guidance for enterprises to carry out technological innovation centered on national needs. Further aims are to support enterprise investment in basic and frontier research and to promote technological innovation by small to mid-sized companies. The agencies also seek to increase the concentration of talent, strengthen the environment for venture capital and other financial support for innovation in enterprises, and to strengthen integration of small, medium and large-sized enterprises, universities, and research institutes in innovation activities. Since the release of Notice 220, two tax-related announcements have been released in support of the action plan.
Announcement [2022] Number 28
Announcement [2022] Number 28 was issued jointly by the MOF, MST and the State Administration of Taxation (SAT). Taking effect on October 1, 2022, the notice outlines the effort to support innovative development, equipment renewal, and technological upgrades by High-Tech and other key enterprises through increased pre-tax deductions. Enterprises that qualify as High-Tech during the fourth quarter of 2022 can take a one-off pre-tax deduction of the full cost of new equipment and appliances purchased during the quarter, and thus can reduce the taxable income for the entire year of 2022. In subsequent years, these new High-Tech enterprises can utilize the 100% weighted pre-tax deduction currently afforded to existing High-Tech enterprises. In addition, for any enterprises that currently enjoy the 75% weighted pre-tax deduction for research and development expenses, the weighted pre-tax deduction shall be increased to 100% for any such costs incurred during the fourth quarter. Several tax calculation options are offered in the announcement.
Announcement [2022] Number 32
On September 30, the MOF and SAT jointly released Announcement [2022] Number 32, which is retroactive to January 1, 2022, and outlines the preferential tax policies for enterprise investment in basic research. For purposes of this announcement, “basic research” does not presuppose a particular application or purpose of use and is primarily aimed at obtaining new knowledge of the underlying principles of phenomena and observable facts. The two types of basic research listed include: 1) Free exploratory basic research that aims to promote knowledge rather than pursue economic or social benefits or actively seek application to practical problems; and 2) Research focused on acquiring knowledge of a certain aspect, expecting to lay a foundation for exploring and solving currently known problems or problems that may be discovered in the future.
The primary tax incentive offered in Announcement 32 is a 100% weighted pre-tax deduction for any enterprises that invest in basic research conducted by non-profit scientific and technological research and development institutions. This would include research institutions and institutions of higher learning established by the State, as well as non-State research institutions registered with civil authorities as privately run non-profit non-enterprises with activity scopes related to scientific research and technological development, transfer of achievements, scientific and technological consultation and services, and evaluation of scientific and technological achievements. The State or non-State non-profit research institutions and institutions of higher learning are exempted from corporate income tax on the basic research funds received from enterprises, individuals and other organizations.
Incentives for Enterprises engaged In Research and Development Engagements
In its efforts to be a global leader in advanced technology since the early 2000s, China has continued to provide, upgrade, and expand its nation-wide incentives and preferential tax policies for both Chinese and foreign-owned enterprises engaged in research and development and the manufacture of advanced products and materials. While many of the incentives involve tax deductions like those offered in the announcements discussed above, others, such as for qualified High-Tech enterprises, include lower overall corporate tax rates as well. Moreover, many local governments continue to offer incentives and subsidies to technology enterprises and R&D centers registered in their districts.
Based on the details provided in the MST/MOF action plan, it is expected that new policies and further enhancements to existing policies will be released during the remainder of this year and in 2023. Foreign and domestic enterprises both should continue to consult with their local Chinese tax experts to stay current with all possible incentives and tax breaks relevant to their industries.
For more information, please contact:
Ms Flora Luo
Director of Foreign Investment, China Tax and Legal Advisory
CLA Global TS Shanghai Office
floraluo@nexiats.com.cn
Dr Scott Heidecke
Senior Consultant
CLA Global TS Shanghai Office
scott@nexiats.com.cn
