China Clarifies Pre-Tax Deductions for R&D Expenses of Resident Enterprises
China’s Ministry of Finance and State Administration of Taxation jointly released the “Circular on Relevant Issues Concerning the Pre-Tax Deduction of Research and Development Expenses (caishui  No.70, hereinafter referred to as the ‘Circular’ )” on September 29, which is retroactively effective from January 1, 2013. Detailed information can be found below.
The Circular applies to resident enterprises which have a sound and reliable financial accounting system and are able to accurately accumulate R&D expenses.
Under China’s Enterprise Income Tax Law, resident enterprises refer to enterprises established in China according to Chinese laws, and those established according to the law of a foreign country (region) but whose actual management body is in China.
Pre-Tax Deduction Expenses
According to the “Circular on Administrative Measures Concerning the Pre-Tax Deduction of Research and Development Expenses (hereinafter referred to as ‘Measures’),” enterprises engaged in the R&D projects listed under the “Circular on Hi-Tech Sectors with Primary Support from the State” and the “Guideline on the Latest Priority Development Sectors in the Hi-Tech Industry (2007)” are allowed to deduct the following expenses incurred in a tax year when calculating taxable income:
- Expenses for the design of new products and formulation of new technological processes (as well as those for purchasing technological books and translating documents);
- Expenses for materials, fuel, and power that are consumed through R&D activities;
- Wages, salaries, bonuses, allowances, and subsidies of personnel directly engaged in the R&D activities;
- Depreciation fees or lease expenses for the instruments or equipment that are specially used for R&D activities;
- Amortization expenses for intangible assets, such as software, patent rights and non-patent technologies;
- Expenses for developing and manufacturing the mold or equipment that are specially used for pilot tests and trial manufacturing;
- Expenses for field testing of exploitation and development technologies; and
- Expenses for the demonstration, review and acceptance check of R&D results.
The Circular adds the following kinds of expenses which are eligible for the pre-tax deduction:
- Basic pension insurance, basic medical insurance, unemployment insurance, work-related injury insurance, maternity insurance and housing funds contributed by the enterprise for employees directly engaged in the R&D activities;
- Expenses for the maintenance, adjustment, inspection and repair of instruments and equipment dedicated to R&D activities;
- Expenses for purchasing sample products or sample machines that do not constitute fixed assets, and those for purchasing general testing means;
- Clinical trial expenses for developing new drugs; and
- Expenses for the evaluation of R&D achievements.
Calculation Method of Pre-Tax Deduction
According to the Measures, where an enterprise carries out the profitability or capitalization of R&D expenses according to the financial accounting and actual situation of R&D projects, pre-tax deductions may be calculated in accordance with the following provisions:
Where the R&D expenses recognized in the profit and loss account for the then-current period do not constitute intangible assets, 50 percent of the R&D expense incurred in the then-current year may be deducted from the taxable income of the then-current year; and
Where the R&D expenses constitute intangible assets, pre-tax amortization shall be made at 150 percent of the cost of such intangible assets. The number of years for such amortization shall be no less than 10 years, unless otherwise provided by law.