Tax Preference Guideline Provides Objective Scrutiny for High/New-tech Enterprises

By Neal Stender, Forrest Ye and Cindy Gong of Orrick, Herrington & Sutcliffe (Hong Kong, Beijing and Shanghai).

The tax-preferred status of a high- and new-technology enterprise (HNTE), which is available to both foreign- and domestically-invested enterprises, is covered by clearer qualification criteria, procedures, benefits, burdens and risks, along with numerical formulae and related procedures designed to maximize objective and fair governmental decision-making. This is a significant part of the trend towards narrowing the tax preferences available to foreign invested enterprises (FIEs), which could previously qualify easily for the production-oriented status that is now being phased out. The only FIEs able to qualify as HNTEs are those able to localize their group's intellectual property ownership, to document their continuous investment in research and development projects, and to maintain a high level of compliance with a broad range of tax and legal requirements.

    These are the key effects of the Working Guideline for Recognition and Administration of High- and New-Technology Enterprises¹ (Working Guideline), promulgated on July 8 2008. The Working Guideline, together with verbal explanations by national and local government officials, are the second round of clarifications on HNTEs under the unified Enterprise Income Tax regime that took effect on January 1 2008. The first round consisted of the April 14 2008 issuance of the High- and New-Technology Enterprise Assessment Administration Measures (Measures) and the Catalogue of High- and New-Technology Industries Specifically Supported by the State (Support Catalogue), which were summarized in China Law & Practice in June 2008.² In comparison with the Measures' relatively general but clearly numbered Articles, the Working Guideline contains more detailed but confusingly numbered sections, along with appended forms for use by applicants and government personnel.