Background
With the implementation of the "PRC Enterprise Income Tax Law" and "Regulations of Implementation of the PRC Enterprise Income Tax Law" (hereinafter collectively referred as "EIT Laws") as of 1 January 2008, the income tax regimes for domestic enterprises and foreign-invested enterprises are unified with a flat tax rate of 25%.
As one of the most attractive tax preferences, the High and New Technology Enterprises ("HNTEs") with key support by the State are eligible to enjoy a reduced income tax rate of 15%. In addition, Circular Guofa [2007] No.40 issued by the State Council further stipulates that HNTEs with key support from the State that complete the registration on or after January 1, 2008 in a special economic zone (i.e. Shenzhen, Zhuhai, Shantou, Xiamen or Hainan Special Economic Zone) or in Pudong New District of Shanghai may be entitled with the enterprise income tax exemption for the first two (2) years as of the tax year to which the first revenue arising from production or operation is attributable, and shall be taxed at half of the statutory tax rate of 25% for the third (3) to the fifth (5) years. Nevertheless, as the EIT Laws and subsequent circulars have not provided detailed recognition criteria and procedure for HNTEs, it is impossible for potential HNTEs to enjoy such tax preferential policies in a timely manner.
On 14 April 2008, the long-awaited "Administrative Measures Governing the Recognition of HNTEs" ("Recognition Measures") and the "High and New Technology Fields with Key Support by the State" ("Supported Fields") with retrospective effect to 1 January 2008 were jointly issued by the Ministry of Science and Technology, the Ministry of Finance and the State Administration of Taxation. The Recognition Measures contain five (5) chapters with twenty (20) clauses which mainly provide details on the administrative organization, recognition authority, recognition criteria, recognition procedure and penalty clause, etc. regarding the HNTEs.
Qualified HNTE
A qualified HNTE shall be a resident enterprise within the PRC (excluding Hong Kong SAR, Macau SAR and Taiwan) which has been established for at least one (1) year. Furthermore, the enterprise shall satisfy the following six (6) criteria:
1) Proprietary intellectual property ("IP") right
The enterprise shall own the proprietary IP right of core technology used in its major products (services) either by self research and development ("R&D") activities, purchase, donation, merger, etc in the last three (3) years or by acquiring the exclusive licensing with a term of more than five (5) years.
2) Qualified products (services)
Products (services) of the enterprise shall fall within the scope of the Supported Fields which comprises fifty one (51) types and two hundred and eighteen (218) items detailed to the following eight (8) fields:
- electronic information technology
- biological and medical technology
- aviation and space technology
- new materials technology
- high-tech services
- new energy and energy conservation technology
- resources and environmental technology
- transformation of traditional sectors through high-new tech
3) Technology staff
Technology staff with university degrees and above shall account for at least 30% of the total staff of the enterprise, among which at least 10% of the total staff shall be engaged in R&D activities.
4) R&D expenditure
The enterprise shall undertake continuous and sustainable R&D activities and the R&D expenditure over the total sales revenue for the past three (3) years shall follow the ratio provided in the table below:
|
Sales revenue of preceding year
|
Ratio of R&D expenditure over sales revenue |
|
below RMB 50 million |
no less than 6% |
|
between RMB 50 million to RMB 200 million |
no less than 4% |
|
more than RMB 200 million |
no less than 3% |
In addition, the R&D expenditure incurred within the territory of the PRC shall be no less than 60% of the total R&D expenditure.
5) Sales revenue
Sales revenue derived from the high and new technology products (services) shall be over 60% of the total annual sales revenue of such enterprise.
6) Working Guidelines on Administration of Recognition of HNTEs ("Recognition Guidelines")
The enterprise shall also satisfy various requirements e.g. the competency of management of the R&D activities, the capability for converting R&D outcome, the number of proprietary IP rights and the growth potential of sales and total assets etc. as stipulated in the Recognition Guidelines which will be promulgated at a later stage.
Recognition Procedures
1) Self assessment
An enterprise shall log onto the "HNTE Recognition Administration Website" ("Recognition Website") for self assessment. Where the enterprise deems it has satisfied all the above mentioned criteria, it is entitled to apply with the competent recognition authority for HNTE Recognition.
2) Submission of application documents
The enterprise shall submit the application documents as stipulated in the Recognition Measures.
3) Verification by the recognition authority
Unlike the previous practice, the recognition authorities will be comprised of officials form the administrative departments of science and technology, the finance and tax authorities at the provincial or equivalent level. The recognition authorities shall establish the experts' pool for assessment of the HNTEs. Upon receiving the application documents, the experts designated by the recognition authority will issue a recognition opinion on the applying enterprise.
4) Recognition, publication and recordal
The recognition authority will then publish the name of the recognized HNTE on the Recognition Website for fifteen (15) working days and if no objection is raised, the enterprise will be granted with the HNTE Certificate which is valid for a term of three (3) years from the issuance date.
Within three (3) months before the expiration of the HNTE Certificate, the HNTE may apply for re-recognition with competent recognition authority to extend the HNTE Certificate for another three (3) years.
In addition, enterprises that were previously granted as the HNTEs before 1 January 2008 shall re-apply the recognition for the HNTE status with the competent recognition authority before it is eligible to enjoy the tax prefernces for the HNTEs.
Upon being approved as a qualified HNTE pursuant to the Recognition Measures, the enterprise is entitled to apply with the in-charge tax authority for the tax exemption or reduction as stipulated in the EIT Laws and relevant regulations.
Impact and Suggestion
Before the adoption of the EIT Laws, foreign invested enterprises were eligible to enjoy numerous tax preferential policies as opposed to the domestic enterprises. It was common for foreign enterprises to structure its business in China in a way that its Chinese subsidiaries did not own proprietary IP right of core technology but instead mainly served as manufacturing companies which were still eligible for tax preferences. As all tax preferential policies specially provided to foreign invested enterprises have been abolished as of 1 January 2008, in order to take full advantage of the one of the most preferential tax policies under the EIT Law, the foreign enterprises may have to consider to restructure their business operations in China by granting the IP rights of core technology to its Chinese subsidiaries which may be eligible for the tax preferences for HNTEs.
As compared with the previous tax regimes, the Recognition Measures give more emphasis on the proprietary IP right of core technology and ongoing R&D activities of HNTEs. An enterprise may own the proprietary IP right of core technology by purchasing or acquiring exclusive licenses from other parties. Furthermore, it shall carry on continuous R&D activities and convert the R&D outcome into production so as to be qualified as an HNTE. We hold that an enterprise which is simply taking advantage of the advanced technology into its production without self R&D activities may no longer satisfy the new requirements of the State and thus may not be qualified as a HNTE.
The Recognition Measures provide detailed recognition procedure for HNTEs with which the enterprises shall follow and get prepared carefully. Furthermore, the potential HNTEs shall keep a close watch on the "Recognition Guidelines" which will stipulate more details to clarify unclear terms, definitions and may add more obligations and requirements on the applicants.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
