Tax Incentives for R&D Activities in China

For china aims to upgrade its tech capabilities, China's 13th Five Year Plan covering the years 2016-2020 maintain that Upgrading science and technology innovation is a critical thing which should be considered. As part of this effort, on December 27, 2016, the Ministry of Finance (MOF), General Administration of Customs (GAC), and State Administration of Taxation (SAT) issued a joint notice (Cai Guan Shui [2016] No.70) to standardize the duty-free import process of scientific and technological research equipment by scientific research institutions, technology development institutions, and schools.

Meanwhile, since being published in 2015, the two notices regarding deduction of R & D expenses (Cai Shui [2015] No. 119 and SAT announcement [2015] No. 97) were implemented in 2016. Therefore, now is a particularly relevant time to consider R & D related tax incentive policies for foreign-invested enterprises (FIEs) to review for effective tax planning.

Support of duty-free imports for science and technology innovation

Regarding foreign-invested R&D institutions in China, Notice No. 70 is applicable for those approved as foreign-invested R&D centers by provincial level authorities of commerce, finance and taxation, as well as local administration of customs.

According to the Notice, the import of scientific research, sci-tech development, and teaching supplies, which domestic suppliers cannot manufacture or for which they are unable to meet performance requirements, are exempt from import duties and import VAT. In addition, teaching books, materials, and relevant scientific research imported by scientific research institutes and schools, are exempt from import VAT. Note that the list of duty-free items may be reviewed within the announcement, Cai Guan Shui [2016] No. 72.

Considerations for additional deduction policies of R & D expenses

Scope of R & D activities

R & D activities refers to systematic activities that an enterprise conducts to obtain and apply new science and technology knowledge creatively or substantially to improve its technologies, product (services), and processes.

However, as the definition of R & D activities is rather vague, Notice No. 119 uses a 'negative list' form to exclude activities and certain industries (as listed below) that do not apply to the pre-tax additional deduction policies.

Activities:

• Conventional upgrades of the enterprise's products (services);

• Direct application of certain technological research results;

• Technical support activities provided by the enterprise to its customers following commercialization;

• Repetitive or simple changes to existing products, services, technologies, materials, or processes;

• Market surveys or management studies;

• Quality control, testing and analysis, repair and maintenance in industry (service) process; and

• Research in social sciences, arts, or humanities.