Tax Benefits For High-Tech Companies-China Q&A (Part 1)
By Sophie Wang, Tanny Chow
16 Dec 2021
Q1 I Heard That There Is Something Called a “High-Tech Company” In China. What Are The Benefits, If Any, Of Being a High-Tech Company?
Suppose a company is recognized as a high-tech company, it will enjoy special tax benefits such as lower corporate income tax rate, extended loss-carrying periods, extra deduction in research and development expenses, tax payment on equity award by installments for qualified technical personnel, tax payment on the transferred and increased shares by installments for shareholders, and extra allowable deduction in vocational training expense.
A high-tech company in China helps save taxes in six ways.
Q2 Can You Explain In Detail How Being A High-Tech Company In China Saves Taxes?
Tax Benefit 1 - Lower corporate income tax rate
A high tech Chinese company enjoys a corporate income tax rate of 15%, comparing to a 25% standard tax rate, bringing a 40% tax saving (Article 4 and 28 of the Law of the People’s Republic of China on Enterprise Income Tax).
Such lower corporate income tax rate applies also to income earned overseas. When computing the deduction limit on foreign tax due, 15% can be used in the calculation of total domestic and foreign taxes payable. (Notice on the questions about the applicable tax rate and tax credits for foreign income of high tech companies.)
Tax Benefit 2 - Longer period for loss-carrying
In general, companies can carry its losses up to 5 fiscal years to offset future profits (Article 18 of the Law of the People’s Republic of China on Enterprise Income Tax).
In contrast, a high tech Chinese company is eligible to carry forward its losses up to 10 years to offset its future earnings. (No. 76 in 2018 from the Ministry of Finance of the People’s Republic of China and the State Taxation Administration, No. 45 in 2018 from the State Taxation Administration).
By extending the loss-carrying period from 5 to 10 years, high-tech companies can enjoy further reduction in tax liability.
Tax Benefit 3 - Extra deduction of research and development expense
A high-tech Chinese company can enjoy the extra deduction of 50% of its research and development expense that is used to calculate profit or losses. If the research and development expense leads to an intangible asset, a high-tech Chinese company can amortize 150% of the cost of the intangible asset before paying taxes.
The research and development expense includes the expenses for hiring personnel related to research and development, direct investment, depreciation expense of fixed assets related to research and development, amortization expense of intangible assets relevant to research and development, and other related expenses.
(No. 119 in 2015 from the Ministry of Finance of the People’s Republic of China, the State Taxation Administration, and the Ministry of Science and Technology of the People’s Republic of China.)
Tax Benefit 4 - Allowing relevant technical personnel to pay tax on equity award by installments
From January 1st, 2016, if qualified technical personnel has difficulty paying the lump-sum tax on equity award granted by a high-tech Chinese company as a result of scientific and technological achievements, he or she can pay the tax on equity awards by installments within 5 calendar years and can determine a payment plan (No. 116 in 2015 from the Ministry of Finance of the People’s Republic of China and the State Taxation Administration).
Tax Benefit 5 - Allowing shareholders to pay the tax on transferred and increased shares by installments
From January 1st, 2016, if a small and middle-sized high-tech Chinese company transfers unallocated earnings, earned surplus, or additional paid-in capital to increase equity of individual shareholders, and the individual shareholder has difficulty paying the lump-sum individual income tax on the increased equity, the individual shareholder can pay such tax by installments within 5 calendar years and can determine a payment plan (No. 116 in 2015 from the Ministry of Finance of the People’s Republic of China and the State Taxation Administration).
Tax Benefit 6 - Extra deduction of the vocational training expense
From January 1st, 2015, high-tech companies can deduct vocational training expenses up to 8% of total before-tax salaries in a fiscal year. Any disallowed vocational training expense in current year can be carried forward to offset future profit. (No. 63 in 2015 from the Ministry of Finance of the People’s Republic of China and the State Taxation Administration).
Tax paying company can enjoy the above tax benefits from the year the accreditation as a high tech Chinese company is received (No. 195 in 2016 from the Ministry of Science and Technology of the People’s Republic of China, the Ministry of Finance of the People’s Republic of China, and the State Taxation Administration).
To qualify as a high tech Chinese company, a company needs to satisfy all of the following conditions:
1. Your company must have been registered to set up for more than 1 year at the time of applying for accreditation.
2. Your company has obtained the ownership of the intellectual property (IP) rights that play a key supporting role in technology to its main products (services) through the following means : researching IP on its own, accepting an IP transfer, accepting IP as gifts, mergers and acquisitions, and so on.
3. The technologies that play a key supporting role to your company’s main products (services) should fall under the category of “Key High-tech Fields Supported by the State”
4. The proportion of scientific and technological personnel who engage in R&D and relevant technological innovative activities in your company should constitute at least 10% of your company’s total employees in a year.
5. The total amount of research and development (R&D) expenses as a % of your company’s total sales revenue in a period in the most recent 3 accounting years (if the actual operating period is less than 3 years, calculation is based on actual operating period) should meet the following requirements:
R&D expenses should be at least 5% for companies earning RMB 50 million or less sales revenue in the most recent year.
R&D expense should be at least 4% for companies earning between RMB 50 million and RMB 200 million sales revenue in the most recent year.
R&D expense should be is at least 3% for companies earning more than RMB 200 million sales revenue in the most recent year.
Of the above, the total amount of your company’s research and development expenses incurred inside China should constitute at least 60% of the total research and development expenses incurred in a period.
6. The proportion of income generated from high-tech products (services) is at least 60% of the total income of your company in the same period in the most recent year.
7. The evaluation of the innovative capability of your company should meet the corresponding requirements per published rules and regulations.
8. There were no reported cases of major safety issue, major quality incidents, or serious environmental regulation violation within 1 year prior to your company’s application for accreditation.
(Article 11 of No. 32 in 2016 from the Ministry of Science and Technology of the People’s Republic of China, the Ministry of Finance of the People’s Republic of China, and the State Taxation Administration.)
If you qualify for these conditions, you can apply to be accredited as a high tech Chinese company.
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