Measures for the Administration of the Pre-tax Deduction of the Research and Development Expenses of Enterprises (Trial Implementation)

(Issued by the State Administration of Taxation on December 10 2008 and effective as of January 1 2008.)

Guo Shui Fa [2008] No.116

Article 1: These Measures have been formulated pursuant to relevant provisions of the PRC Enterprise Income Tax Law and its Implementing Regulations, the PRC Law on the Administration of the Levy and Collection of Taxes and its Implementing Rules and the State Council, Circular on the Issuance of Several Supporting Policies for Implementing the <Outline of the State Plan for the Medium and Long Term Development of Science and Technology (2006-2020)> (Guo Fa [2006] No.6) in order to encourage enterprises to carry out research and development activities and to regulate the pre-tax deduction of the research and development expenses of enterprises and the implementation of relevant preferential tax policies.

Article 2: These Measures shall apply to tax-resident enterprises (Enterprises) that have sound finances, practise sound accounting and are capable of accurately aggregating their research and development expenses.

Article 3: For the purposes of these Measures, the term “research and development activities” means the continuing research and development activities with clear objectives that are carried out by Enterprises in order to obtain new scientific and technological (excluding humanities and social science) knowledge, creatively apply new scientific and technological knowledge or substantively improve technologies, processes and/or products (or services).

The phrase “creatively apply new scientific and technical knowledge or substantively improve technologies, processes and/or products (or services)” means the obtaining by Enterprises of valuable achievements from technological, process and/or product (or service) innovations derived from research and development activities, or the obtaining of a leading position in technologies and processes by the relevant industry of Enterprises in their local regions (provinces, autonomous regions, municipalities directly under the central government, or cities with independent development plans) in which the Enterprises have acted as a driving force, but excludes activities such as conventional upgrading of enterprise products (or services) or the direct application of research and development achievements that have been publicly disclosed (e.g. the direct use of new processes, materials, apparatus, products, services or knowledge, etc. that has been publicly disclosed).

Article 4: If an Enterprise engages in research and development activities for a project as specified in the High and New Technology Sectors Preferentially Supported by the State or the Guide to Key High Technology Sectors Currently Targeted for Priority Development into Industries (2007) published by the National Development and Reform Commission and other departments, it shall, in accordance with provisions, be permitted to super-deduct the expenses and expenditures set forth below that it actually incurred in a tax year when it calculates its taxable income:

(1) new product design expenses, expenses for formulating rules for a new process and technical book and information expenses and information translation expenses directly related to its research and development activities;

(2) expenses for materials, fuel and power consumed directly in engaging in the research and development activities;

(3) wages, salaries, bonuses, allowances and subsidies of personnel directly involved in the research and development activities;

(4) depreciation expenses or leasing expenses for instruments and equipment used solely for the research and development activities;

(5) expenses for the amortisation of intangible assets such as software, patents, non-patented technologies, etc. used solely for the research and development activities;

(6) expenses incurred in the development and manufacture of dies and process apparatus solely used in intermediate testing and trial product manufacturing;

(7) onsite testing expenses for exploration and development technologies; and

(8) expenses for the demonstration, assessment and acceptance of research and development achievements.

Article 5: With respect to joint development projects between or among Enterprises and satisfying the foregoing conditions, each of the co-operating parties may, in accordance with provisions, super-deduct the respective research and development expenses that it incurred.

Article 6: The super-deduction of research and development expenses satisfying the foregoing conditions and incurred for development that has been commissioned by an Enterprise to a third party may, in accordance with provisions, be calculated by the principal, but the contractor may not effect such super-deduction.

For a project the development of which has been commissioned to a third party, the contractor shall provide to the principal a detailed breakdown of the expenses and expenditures incurred for the research and development project, failing which such expenses and expenditures may not be super-deducted.

Article 7: If an Enterprise, in line with the actual circumstances of financial accounting and the research and development project, treats incurred research and development expenses as yield or capitalises the same, it may calculate the super-deduction in accordance with the following provisions:

(1) if research and development expenses are entered as gains and losses for the period without giving rise to any intangible asset, the Enterprise shall be permitted to also deduct 50% of the actual research and development expenses incurred during the year in question directly from its taxable income for that year; or

(2) if the research and development expenses give rise to an intangible asset, they shall be amortised before tax at the rate of 150% of the cost of such intangible asset. Unless otherwise provided in law, the amortisation period may not be less than 10 years.

Article 8: Expense and expenditure items that laws, administrative regulations or provisions of the State Administration of Taxation do not permit to be deducted before enterprise income tax may not be included as research and development expenses.

Article 9: If an Enterprise has not established a dedicated research and development entity or if the research and development entity of an Enterprise also undertakes production and sales/service provision tasks, the research and development expenses and the production and other business expenses shall be accounted for separately and each research and development expense and expenditure shall be accurately and rationally calculated. If the aforementioned expenses are not clearly separated, the research and development expenses may not be super-deducted.

Article 10: An Enterprise must keep dedicated accounts for its research and development expenses and must, in line with the items set forth in the Table hereto, accurately aggregate and fill in the actual amount of each research and development expense that is incurred during the year and is eligible for super-deduction. The Enterprise shall, at the time of filing of its returns for final settlement of annual income tax, submit to the competent tax authority the relevant information specified herein. If reported research and development expenses are false or if the information is incomplete, the Enterprise shall not be eligible for super-deduction of its research and development expenses and the competent tax authority shall have the right to reasonably revise the results filed by the Enterprise.

If an Enterprise undertakes more than one research and development activity in a tax year, it shall separately aggregate the super-deductible research and development expenses for each research and development project.

Article 11: When an Enterprise applies for super-deduction of its research and development expenses, it shall submit the following materials to the competent tax authority:

(1) the plan for the self-directed, commissioned or co-operative research and development project and the research and development expense budget therefor;

(2) an account of the establishment of the dedicated self-directed, commissioned or co-operative research and development entity or project team and the list of the professionals therein;

(3) a table aggregating the research and development expenses incurred during the year in connection with the self-directed, commissioned or co-operative research and development project;

(4) the resolution document of the general manager's working meeting or the board of directors of the Enterprise on the proposal for the self-directed, commissioned or co-operative research and development project;

(5) the contract or agreement for the commissioned or co-operative research and development project; and

(6) an account of the effectiveness of the research and development project, the research achievement report and other such materials.

Article 12: With respect to research and development expenses actually incurred, an Enterprise shall be permitted to deduct the same as incurred when it makes advance payment of income tax during the year, and, at the end of the year when it files its income tax returns for the year and carries out final settlement thereof, it shall calculate the super-deduction in accordance herewith.

Article 13: If the competent tax authority disagrees with a research and development project reported by an Enterprise, it may require the Enterprise to provide the assessment opinion from the government's science and technology authority.

Article 14: If the actual amounts of the various research and development expense items incurred by an Enterprise are inaccurately aggregated, or if the total amount is inaccurately calculated, the competent tax authority shall have the right to revise the amount deductible before tax or the super-deduction amount.

Article 15: An Enterprise group may, in line with the actual circumstances of its production and sales/service provision and of its scientific and technological development, apportion, in accordance with a reasonable apportionment method, the actual research and development expenses incurred in connection with a research and development project that has high technical requirements, involves a large investment and requires centralised development by the group among the group members that benefit from such project.

Article 16: If an Enterprise group adopts a reasonable apportionment of research and development expenses, it shall provide the agreement or contract for the centralised research and development project. Such agreement or contract shall expressly specify the rights and obligations of each of the parties involved in the research and development project, the method for the apportionment of the expenses, etc. If the Enterprise group fails to provide the agreement or contract, it may not super-deduct the research and development expenses.

Article 17: If an Enterprise group adopts a reasonable apportionment of research and development expenses, the method for the apportionment of the research and development expenses actually incurred in connection with the centralised research and development project shall be reasonably determined based on the principle of consistency of rights and obligations, and of expenses/expenditures and the benefits enjoyed.

Article 18: When an Enterprise group adopts a reasonable apportionment of research and development expenses, the parent of the Enterprise group shall be responsible for preparing the proposal for the centralised research and development project, the research and development expense budget, the statement of final accounts and the final accounts apportionment statement.

Article 19: In the event of a disagreement between the tax authorities and an Enterprise in respect of the method of apportioning the Enterprise group's centralised research and development expenses or the amount thereof, and if members of the Enterprise group are established in different provinces, autonomous regions, municipalities directly under the central government or cities with independent development plans, the Enterprise shall deduct the research and development expenses actually apportioned to it based on the ruling rendered by the State Administration of Taxation. If the members of the Enterprise group are located in the same province, autonomous region, municipality directly under the central government or city with an independent development plan, the Enterprise shall deduct the research and development expenses actually apportioned to it based on the ruling rendered by the provincial tax authority.

Article 20: These Measures shall be effective as of January 1 2008.

Appendix: Table Aggregating the Super-deductible Research and Development Expenses Incurred in Connection with a Research and Development Project (omitted).