In our July 2022 Issue of Newsletter, we will continue to discuss some of the important updates in PRC Tax in the First Half of 2022.
3. Enhanced Tax Deduction on R&D Enterprises in China in Years 2021 and 2022
Enhanced R&D Tax Deduction is now extended to Manufacturing and Small and Medium-Sized Technological Enterprises
Enhanced Tax Deduction is now available to the below R&D expenses:-
- Actual R&D expenses incurred in the course of R&D activities; and
- Amortisation of Intangible Assets generated from R&D activities.
Below are Enhanced Tax Deduction Rates available to various type of enterprises in China:-
Various Type of Entity
Enhanced Tax Deduction Rate on R&D expenses
All Enterprises (except for Manufacturing and other businesses*)
1 January 2018 -
31 December 2023
Starting from 1 January 2021
Small and Medium-Sized Technological Enterprises^
Starting from 1 January 2022
* Other businesses comprise Accommodation and Catering, Retail and Distribution, Immovable Property, Leasing and Business Centre and Entertainment Business
# To qualify as Manufacturing Enterprise, over 50% of Revenues of the enterprise have to be generated from manufacturing business
^ Please refer to the below Reference Link for the Definition of Small and Medium-Sized Technological Enterprises
Points to note
We can observe that Mainland China authorities have exerted extensive effort to promote the technological development of Chinese Enterprises. The Tax benefits are now not limited to Reduced Corporate Income Tax Rates of 15% for High and New Technology Enterprise. With the above introduction of above Enhanced R&D Tax Deduction, Chinese Enterprises carrying out R&D activities are now enjoying tremendous amount of tax benefits in addition to other government subsidies.
MNCs purely engaged in R&D activities in Mainland China may select to incorporate a Wholly-owned Foreign Enterprise (WFOE) or a Representative Office (RO) when it is not expected to derive any income in Mainland China. Besides other general considerations, the tax relief would be another important consideration to set up a WFOE or RO as they are generally available to Chinese Tax Resident Enterprise only. In such case, it is unlikely that RO will be able to enjoy such benefits.