China: innovation incentives overview

There are several R&D tax incentives aimed at encouraging companies who conduct R&D activities to continuously increase their R&D investment and enhance their competitiveness.

There are two main incentives policies:

- High and New Technology Enterprise (HNTE), which reduces the statutory tax rate payable

- R&D super deduction

 In addition, there are other tax incentives on VAT, related to R&D equipment and technical-related services.

HNTE: A reduced corporation tax (CIT) rate of 15% (normally 25%).

R&D super deduction: Additional deduction before income tax filing.

Are there specific industries that qualify or are there reliefs that require a particular industry focus?

HNTE: The company must be on the approved list of eligible sectors, as detailed in the document “Key industry of High and New Technologies Supported by the State”, which are:

1. Electronic information

2. Biology and new medicine

3. Aerospace

4. New materials

5. High-tech services

6. New energy and energy conservation

7. Resources and environment

8. Advanced manufacturing and automation

R&D super deduction: All industries are eligible, except tobacco manufacturing, lodging and F&B, wholesale and retail, real estate, entertainment and any other industries stipulated by the Ministry of Finance and State Administration of Taxation.

Certain high-tech enterprises (e.g., integrated circuits and software), small and medium-sized high and new technology enterprises can benefit from higher incentives.

Do you have to apply for incentives prior to conducting the research or claiming the benefit?

HNTE: No, enterprises can apply for the HNTE certificate after they have completed their R&D project and obtained the IP rights.

Are there specific documentation or reporting requirements for claiming incentives?

HNTE: Yes. The application is time-consuming and complicated.

R&D: The list of required documents is as follows. These should be retained by the company for potential future tax audits.

- Proposal for the R&D project, and the Board resolution approving the proposal.

- Composition of the organisation or project team for the R&D project, including the name of those working on the project.

- Contract for the R&D project, as registered with the Chinese science and technology administrative authorities.

- Explanation of the expense distribution of staff undertaking R&D activities and instruments, as well as equipment and intangible assets used for R&D activities (including records on work and usage).

- Balance sheet for R&D expenses, including breakdown of distribution of expenses and the actual benefit-sharing ratio, etc.

- Subsidiary ledger for R&D expenditure.

- Where the enterprise has obtained an expert opinion from the science and technology administrative authorities at prefectural level and above, the expert opinion should be retained for future inspection.

- Any other materials stipulated by the provincial tax authorities.

There are no tax credits and R&D grants provided under China R&D tax incentive regimes. No such quantification is available in China for R&D spend. It depends on different scenarios, and it is not possible to determine the benefit in detail.

HNTE: Accreditation of HNTE usually occurs in two or four batches every year, on set dates. In 2023, it was carried out in four batches: on April 21, June 30, August 25 and October 20. The number of batches is confirmed at the beginning of each year.

R&D:  The super deduction is declared at the time of annual CIT filling.

HNTE: Companies must have been established in China for at least one year before applying for HNTE certification, which lasts for three years. After obtaining HNTE certification, the enterprise must report annually.

There are no additional deadlines or reporting obligations for the R&D super deduction, which is claimed as part of the annual CIT filling.

Only available to residence qualified companies.

 HNTE: company must have obtained IP ownership and the core technology of its key products (services) must fall under the stipulated scope. In addition, there are special financial indicators that must be met (e.g. technical personnel engaging in innovation activities, the percentage of the total amount of expenditure for R&D, the revenue from high-tech products (services)).

There is no limit on company size, etc., for the R&D super deduction.

Eligible R&D activities are defined in the document, “Key Areas of High and New Technologies Supported by the State”. The criteria are determined by the Ministry of Science and Technology, the Ministry of Finance and the State Administration of Taxation.

Do the R&D activities have to be performed within the country to qualify? If not, is there a distinction made between the country where the claimant company is resident, EU countries, and non-EU countries?

No, the company can also entrust an external organisation or individual to carry out R&D activities, but these kinds of R&D activities have special provisions.

Does the intellectual property need to reside in the country granting the incentives or in the company claiming the incentives?

The HNTE certified company must be registered in China and have ownership of the IP (registered in China).

For the R&D super deduction, there is no specific requirement on the ownership of the IP.

Does the tax authority have to review the resultant developments to allow a deduction or credit?

No, but the company must be able to demonstrate the R&D results/IP to apply.

It should also retain the required filing documents for any possible tax audit in the future.

Staff and labour expenses, direct cost, depreciation, amortisation of intangible asset, design fees, and other relevant expenses. All the expenses must be within the prescribed list.

There is no specific requirement for revenue and / or capital from a tax perspective; it should be in line with accounting standards.

Are the incentives temporary or permanent?

HNTE: Temporary.

R&D: Permanent. Although the eligibility of the R&D super deduction is subject to whether the company meets the requirements to qualify R&D expenses throughout the year and complete the required tax returns on time.

How is the benefit obtained?

HNTE: Reduction of statutory tax rate, no cash credit.

R&D: Additional deduction before tax.

Are the incentives incremental in nature or volume-based?

It is calculated based on actual eligible R&D expenses incurred.

Are there general rules for estimating the value of the incentives?

Yes, the annual tax return includes detailed formulas for calculating CIT liabilities.

Applications for HNTE are rigorous and complex, involving many government departments and professional third-party firms.

The typical steps are:

- determine the qualifying projects

- obtain the associated expenses

- prepare a detailed R&D report at least six months in advance

- submit final R&D reports and application documents to the relevant government authorities before the specific date

- Claims for the R&D super deduction are submitted with the annual CIT annual filling. Claims may be subject to the review from tax authority if they have any concerns. 

Is there a cap on the maximum level of benefit that can be received per year, per company, or for all the qualifying taxpayers together?

There are no cap limits. It is based on the actual amount incurred.

Are tax credits refundable?

N/a.

Can surplus incentives be carried back or forward and used in years other than the origination years?

No.

Are there any other types of limitations?

HNTE certification must be renewed every three years.

Are the R&D costs deductible when deriving taxable income? Are costs required to be capitalized for tax purposes?

Qualified R&D expenditure recorded on an accrual basis can be deducted for income tax purpose for the year it incurs.

No specific requirement is stipulated for R&D cost capitalisation, which should be in line with accounting standards. 

VAT-based incentives: A full VAT refund is available for the procurement of domestically made equipment by foreign-invested R&D enterprises.

Technology transfer, technology development and related technical consulting services are also exempt from VAT.