Circular on Continuing Implementation of the Tax Policy for the Procurement of Equipment by Research and Development Institutions

(Issued by the Ministry of Finance, the Ministry of Commerce, the General Administration of Customs and the State Administration of Taxation on October 10 2011, effective from January 1 2011 to December 31 2015.)

Cai Shui [2011] No.88

Finance departments (bureaux), competent commerce departments and offices of the State Administration of Taxation of the provinces, autonomous regions, municipalities directly under the central government and cities with independent development plans, Guangdong branch and directly subordinate customs houses of the General Administration of Customs and the Finance Bureau of the Xinjiang Production and Construction Corps:

With a view to encouraging scientific research and technological development and promoting scientific and technological progress, it has been decided, following approval by the State Council, to continue to exempt articles used for scientific and technological development purposes and imported by foreign-invested research and development centres from import duties, import value-added tax and consumption tax (hereinafter collectively referred to as “Import Taxes”) and to continue to fully refund the value-added tax on equipment made in China procured by wholly domestically-owned research and development institutions and foreign-invested research and development centres. We hereby specify relevant matters as follows:

1. The Tentative Provisions for the Exemption of Import Taxes on Articles Used for Scientific and Technological Development Purposes (Order of the Ministry of Finance, the General Administration of Customs and the State Administration of Taxation No.44) and the Decision on Amending the <Tentative Provisions for the Exemption of Import Taxes on Articles Used for Scientific and Technological Development Purposes> and the <Provisions for the Exemption of Import Taxes on Articles Used for Scientific Research and Teaching> (Order of the Ministry of Finance, the General Administration of Customs and the State Administration of Taxation No.63) shall apply to the exemption of foreign-invested research and development centres from Import Taxes. Depending on their dates of establishment, they shall respectively satisfy the following conditions:

(1) a foreign-invested research and development centre established on or before September 30 2009 shall satisfy all of the following conditions:

(i) criteria for research and development expenses: (1) for a foreign-invested research and development centre that has independent legal personality, a total investment of not less than US$5 million; for one that does not have independent legal personality, such as a department within a company, or a branch, total research and development outlays of not less than US$5 million; (2) annual expenditures of corporate research and development funds of not less than Rmb10 million;

(ii) full-time research and experimental development personnel numbering not less than 90 persons; and

(iii) the total original value of the equipment purchased since its establishment being not less than Rmb10 million;

(2) a foreign-invested research and development centre established on or after October 1 2009 shall satisfy all of the following conditions:

(i) criteria for research and development expenses: if it has independent legal personality, a total investment of not less than US$8 million; and if it does not have independent legal personality, such as a department within a company, or a branch, total research and development outlays of not less than US$8 million;

(ii) full-time research and experimental development personnel numbering not less than 150 persons; and

(iii) the total original value of the equipment purchased since its establishment being not less than Rmb20 million.

A foreign-invested research and development centre shall be required to undergo review and recognition of its qualifications by the competent commerce department, in concert with relevant departments, carried out based on the foregoing conditions. For the specific review and recognition measures, see Appendix 1.

2. Domestically-invested research and development institutions and foreign-invested research and development centres to which the policy of fully refunding value-added tax on the procurement of equipment made in China applies include the following:

(1) scientific research and technological development institutions specified in the Tentative Provisions for the Exemption of Import Taxes on Articles Used for Scientific and Technological Development Purposes (Order of the Ministry of Finance, the General Administration of Customs and the State Administration of Taxation No.44);

(2) scientific research institutions and schools specified in the Provisions for the Exemption of Import Taxes on Articles Used for Scientific Research and Teaching (Order of the Ministry of Finance, the General Administration of Customs and the State Administration of Taxation No.45); and

(3) foreign-invested research and development centres that satisfy the conditions set forth in Article 1 hereof.

The specific measures for the administration of the tax refunds shall be formulated separately by the State Administration of Taxation together with the Ministry of Finance.

3. Definitions relevant to this Circular:

(1) For the purposes of this Circular, the term “total investment” means the amount recorded on the approval certificate of a foreign-invested enterprise.

(2) For the purposes of this Circular, the term “total research and development outlays” means the assets committed by a foreign-invested enterprise specifically for the purpose of establishing and constructing the research and development centre in question, including assets that are soon to be committed and for which a purchase contract has been executed (a list of the assets that have already been purchased and a list of the contracts for the assets that are on the verge of being procured shall be submitted).

(3) For the purposes of this Circular, the term “annual expenditures of corporate research and development funds” means the average of annual expenditures of corporate research and development funds in the last two financial years; if a foreign-invested research and development centre has been in existence for less than two years, such annual expenditures may be calculated using the actual expenditures of research and development funds for any continuous 12 month period since the centre's establishment; the outlays in cash and physical assets shall not be less than 60%.

(4) For the purposes of this Circular, the term “full-time research and experimental development personnel” means those persons among an enterprise's science and technology activity personnel who engage full time in basic research, practical research and experimental development, and includes those persons who are directly involved in the aforementioned three types of project activities, the related full-time science and technology management personnel and the direct service personnel who provide information and documentation, materials supply and equipment for such projects. Such personnel must have executed employment contracts with a term of at least one year with the foreign-invested research and development centre or the foreign-invested enterprise to which it belongs. Their number shall be the number of persons on the day before the foreign-invested research and development centre submits its application.

(5) For the purposes of this Circular, the term “equipment” means experimental equipment, apparatus and machinery that provide the necessary conditions for scientific research, teaching, and scientific and technological development. When calculating the total original value of equipment purchased, the original value of imported equipment and of procured equipment made in China shall be calculated together, including that of equipment for which a purchase contract has been executed and which will be delivered in the year in question (a list of the purchase contracts and the delivery dates shall be provided). The aforementioned equipment shall fall within the equipment listed on the List of Scientific and Technological Development, Scientific Research and Teaching Equipment (see Appendix 2) hereof. In the event of a difference of opinion as to the scope of equipment made in China encountered in the course of implementation, the issue shall be reported by the competent tax authority through the hierarchy to the State Administration of Taxation, which will render a determination after consulting with the Ministry of Finance.

4. The period of implementation of the tax policy specified herein shall run from January 1 2011 to December 31 2015, and, more specifically, shall be implemented from the first of the month immediately succeeding the month in which a domestically-invested research and development institution or foreign-invested research and development centre secures its qualifications. The Ministry of Finance, General Administration of Customs and State Administration of Taxation, Circular on Tax Policies for Equipment Procured by Research and Development Institutions (Cai Shui [2009] No.115) and the Ministry of Commerce, Ministry of Finance, General Administration of Customs and State Administration of Taxation, Circular on Measures for Reviewing the Qualifications of Foreign-invested Research and Development Centres for Tax Exemptions/Refunds on Procured Equipment (Shang Zi Fa [2010] No.93) are repealed simultaneously.

Foreign-invested research and development centres that are approved and established between January 1 and November 1 2011, and that import articles used for scientific and technological development purposes between the first of the month immediately succeeding the month in which they secured their qualifications and November 1 and on which they have paid taxes may apply to customs to carry out tax refund procedures in accordance with relevant customs provisions.

Appendices:

1. Measures for Reviewing and Determining the Qualifications of Foreign-invested Research and Development Centres for Tax Exemptions/Refunds on Procured Equipment

2. List of Scientific and Technological Development, Scientific Research and Teaching Equipment (omitted)

Appendix 1

Measures for Reviewing and Determining the Qualifications of Foreign-invested Research and Development Centres for Tax Exemptions/Refunds on Procured Equipment

With a view to duly implementing the tax policy relating to the equipment procured by foreign-invested research and development centres (including research and development centres both with and without legal personality; hereinafter referred to as “R&D Centres”), we hereby formulate the following measures for reviewing and determining their qualifications:

1. Review of Qualifying Conditions

(1) The competent commerce department of the province, autonomous region, municipality directly under the central government, city with independent development plans or the Xinjiang Production and Construction Corps together with the finance and state tax departments at the same level and the directly subordinate customs of the place where an R&D Centre is located (the Review Departments) shall formulate the review procedures and specific measures based on the circumstances of their jurisdiction. An R&D Centre shall submit its application materials to the competent commerce department of the place where it is located in accordance with the relevant requirements of this Circular.

(2) The competent commerce department, in the lead, shall hold a joint meeting with the Review Departments whereat they shall review the application materials submitted by R&D Centres and, based on the conditions set forth in Article 1 of the main text of this Circular and the requirements of these Measures determine the list of R&D Centres that satisfy the qualifying conditions for tax exemptions/refunds.

(3) Following their review, the Review Departments shall jointly publish a list of the R&D Centres that satisfy the qualifying conditions for tax exemptions/refunds in the form of an announcement, with copies sent to the (Department of Foreign Investment Administration of the) Ministry of Commerce, the (Department of Taxation and the Department of Customs Duties of the) Ministry of Finance, the (Customs Duties Collection and Control Department of the) General Administration of Customs and the (Department of Goods and Labour Tax of the) State Administration of Taxation for record filing. To those that do not satisfy relevant provisions, the competent commerce department shall issue a written review opinion based on the decision of the joint meeting and give the reason. The aforementioned announcement or review opinion shall be issued within 45 working days from the date on which the Review Departments accepted the application.

(4) Every two years, the Review Departments shall conduct a re-examination of the qualifications of those R&D Centres that have secured qualifications for tax exemptions/refunds. They shall cancel the qualifications to enjoy the tax breaks of those R&D Centres that no longer satisfy the conditions.

2. Materials that Need to be Submitted

When an R&D Centre applies for qualifications for tax exemptions/refunds on procured equipment, it shall submit the following materials:

(1) a written application for the qualifications for tax exemptions/refunds on equipment procured by an R&D Centre and a review form;

(2) if it has independent legal personality, photocopies of its approval certificate of a foreign-invested enterprise and business licence; if it does not have independent legal personality, photocopies of the approval certificate of a foreign-invested enterprise and business licence of the foreign-invested enterprise to which it belongs and the document confirming its being an R&D Centre (the official reply from, or the Confirmation of a Foreign-invested Project the Development of Which is Encouraged by the State issued by, the competent commerce department);

(3) a capital verification report and a photocopy of its audit report for the preceding year;

(4) a detailed breakdown of its research and development expenses and expenditures, a detailed breakdown of its equipment purchase expenditures and a list of the equipment purchased, and the materials that it is required to submit as specified in the Circular;

(5) a list of its full-time research and experimental development personnel (including their names, positions, employment contract terms and contact information); and

(6) other materials that the Review Departments require be submitted.

3. Administration of the Relevant Work

(1) Once the announcement has been published, an R&D Centre included on the list in the announcement may, in accordance with provisions, directly carry out the application procedures for the exemption of taxes on articles imported for scientific and technological development purposes with the local directly subordinate customs and the procedures for tax refunds on procured equipment made in China with the local state tax department.

(2) When jointly conducting a review to determine whether an R&D Centre has the qualifications, the Review Departments may go to the R&D Centre to review relevant information, understand the circumstances and ascertain the truthfulness of the application materials submitted by the R&D Centre. Additionally, they shall be sure to strengthen policy guidance of and service to the R&D Centre so as to enhance work efficiency.

(3) The competent provincial-level commerce departments shall, in a timely manner, input the relevant information appearing on the Form for the Review of the Qualifications of a Foreign-invested Research and Development Centre for Tax Exemptions/Refunds on Procured Equipment into the R&D Centre section of the management system for foreign investment examination and approval, and file the same electronically with the Ministry of Commerce for record filing.

(4) Customs and state tax departments shall strengthen their oversight of equipment for which tax exemptions/refunds have been granted. If an R&D Centre violates provisions by transferring, selling, diverting for other purposes or otherwise disposing of, without authorisation, equipment on which it has enjoyed tax breaks, it shall be penalised in accordance with relevant provisions and shall not be eligible for tax breaks for one year from the date on which the violation came to light. If it is criminally prosecuted in accordance with the law, it shall not be eligible for tax breaks for three years from the date on which the violation came to light.

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