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Insights e-Newsletter

Applicable Scope Expansion for Additional 75% Deduction of Research and Development Expenses

Reading Guide

 

Mr. Li Keqiang, Premier of the State Council held an executive meeting of the State Council on 23 July 2018. He emphasized that on the basis of ensuring tax burden reduction by more than RMB 1.1 trillion in the year, the applicable scope of additional 75% deduction of research and development (“R&D”) expenses would expand from small and medium high technology enterprises to all the enterprises. In order to implement the new policy when it is officially announced,  it is important to understand the current policy of pre-tax additional deduction of R&D expenses.

 

Policy Overview

 

According to “Notice on Improving the Policy of Pre-tax Additional Deduction of R&D Expenses” (Cai Shui (2015) No. 119), the R&D expenses, arose from R&D activities of enterprise, which do not form intangible assets but are directly recognized as profit and loss in the current period, are eligible for additional tax deductions of 50% after the actual R&D expense is deductible before income tax. On the other hand, the R&D expenses which form intangible assets are deductible before income tax through amortization of 150% cost of intangible assets.

According to “Notice on Improving the Policy of Pre-tax Additional Deduction of R&D Expense for Small and Medium-sized Technological Enterprises” (Cai Shui (2017) No. 34), from the period of 1 January 2017 to 31 December 2019, the R&D expenses occurred in R&D activities of small and medium-sized enterprises, which doesn’t form the intangible asset but directly recognized as profit and loss in the current period, is eligible for additional tax deductions of 75% after the actual R&D expense is deductible before income tax. On the other hand, the R&D expenses which form intangible assets are deductible before income tax through amortization of 175% cost of intangible asset.

According to the speech given by Mr. Li Keqiang, the Premier of the State Council on 23 July 2018, the applicable scope of additional 75% deduction of R&D expenses would expand from small and medium high technology enterprises to all the enterprises.

 

Identification of Small and Medium-Sized High-Tech Enterprises

 

According to “Notice Issued by the Ministry of Science and Technology, the Ministry of Finance and the State Administration of Taxation on the Issuance of the Evaluation Methods for Small and Medium-sized Technological enterprises”(Guo Ke Fa Zheng (2017) No. 115), small and medium-sized high-technology enterprises must meet all the following conditions:

1. Resident enterprises registered in China (excluding Hong Kong, Macao and Taiwan).

2. The total number of employees is no more than 500, the annual sales income no more than RMB 200 million and the total assets no more than RMB 200 million.

3. Products and services provided by enterprises are not prohibited, restricted or eliminated by the state.

4. Enterprises do not have significant safety, significant quality accidents, serious environmental violations or serious dishonesty in scientific researches in both this year and the year before. And the enterprises are not listed in the name list of abnormal business and serious illegal and trustworthy enterprises.

5. The total score is at least 60 points in the comprehensive evaluation of small and medium-sized high technology enterprises index. And the score of technicians index part is not 0.