China’s Ministry of Finance together with the State Taxation Administration have issued an announcement with the goal to enhance the existing policies for pre-tax additional deductions for R&D expenses. The announcement was first issued on April 7^th, 2021 and is effective retrospectively from January 1^st, 2021. In order to further stimulate enterprises to increase investment in research and development (R&D), as well as support scientific and technological innovation, the pre-tax additional deduction policy for enterprise R&D expenses has been further increased.

If R&D expenses incurred by manufacturing enterprises in conducting R&D activities have not formed intangible assets and are included in the current profits and losses, they shall be deducted according to the regulations and these expenses can be additionally deducted before tax at 100 percent of the actual deductions. Previously, manufacturing firms could additiona only deduct 75% of their R&D expenses. However, if intangible assets have been formed, starting from January 1^st, 2021, they can be amortized before tax at 200 percent of the actual deductions.

The manufacturing enterprises which can benefit from this policy are those whose main business revenue generated from manufacturing accounted for more than 50% of the total revenue in the given year.

When enterprises file and prepay corporate income tax (CIT) in the third quarter of the year (if taxes are filed quarterly) or September (if taxes are filed monthly), they can choose to enjoy the preferential deduction policy for R&D expenses in the first half of the year. If not, they can apply the preferential additional deduction policy for R&D expenses during the annual CIT filing.

It is estimated that the new policy will cut corporate income taxes by roughly RMB 80 billion. This is one of the largest tax cuts implemented in China in 2021, as the country supports domestic businesses amidst the global economic recovery from the Covid-19 pandemic.

At PHC Advisory, our team is constantly monitoring the most recent developments and incentives accessible to businesses in China. Feel free to reach us at info@phcadvisory.com to find out more about preferential policies in China that your company could benefit from.