China Broadens Super-Deduction To R&D Expenses Accrued Overseas

; posted on
June 28th, 2018

The Ministry of Finance, the State Administration of Taxation, and the Ministry of Science and Technology in China jointly issued a Circular (Cai Shui [2018] No.64), announcing a broader scope of expenses entitled to the super-deduction incentive for corporate income tax purpose. The Circular come into force with retroactive effect on January 1, 2018, with Art.2 under Circular Cai Shui [2015] No.119 expired simultaneously.

R&D Expenses Incurred Overseas through Contract Service

The Circular provides that for expenses arisen from contract R&D activities accrued overseas, the principal company may record 80% of the actual amount incurred into its overseas R&D expenses for contract activities. The principal enterprise may super-deduct its overseas R&D expenses for contract activities to the extent that such expenses do not excess two third of the enterprise’s qualified expenses accrued domestically for corporate income tax purpose. To be noted, super-deduction rules under this Circular do not apply to expenses accrued from activities committed to foreign individuals. The super-deduction rate applied is either 150% or 175% based on industry and size of the principal enterprise.

Other R&D Incentives in China

The Chinese competent authority has been increasingly emphasised innovation during past decades. There are mainly four types of tax incentives to encourage local R&D activities:

  • High and New Technology Enterprise: for local Chinese entity retaining the legal title of the technology,
  • Technology Advanced Service Enterprise: for the local entity whose service falls within the recognized scope with 35% of its income deriving from offshore outsourcing business, a lower income tax rate of 15% may apply, compared with the standard rate of 25%;
  • R&D Expense Super-deduction: for qualified R&D expense, a 50% super-deduction is provided; for expenditures capitalized as intangible assets, it is allowed to amortize 150% of the cost base for such intangible assets;
  • Other industry-specific incentives, especially ones applicable to the software and integrated circuit business.

Source: SAT (CN)

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