China improves R&D super-deduction for manufacturing, extends multiple tax breaks for doing business in China – Multinational corporation tax

By Hengka (Henry) JI, Partner, Zhong Lun Law Firm, Beijing

In order to further support technological innovation, the development of micro and small enterprises and related enterprises, the Chinese Ministry of Finance and its State Administration of Taxation released on March 15 Announcement n ° 6 of 2021 concerning the extension of several preferential tax policies.

The new announcement n ° 6 extends numerous preferential tax policies available to companies, broken down into 25 different tax circulars. The extended preferential tax the policies set out in announcement # 6 mainly apply to income tax, value added tax, resource tax and stamp duty.

In addition, the following week, on March 24, an executive meeting of the Chinese State Council announced that as of January 1, 2021, China’s research and development “super deduction” will be significantly improved for manufacturing enterprises. . According to the Chinese State Council, the changes will represent China’s biggest tax cut this year.

Multinationals operating in China should take into account developments in tax planning, management and tax reporting.

Capital investments

Announcement # 6 extends tax benefits to a company that recently purchases fixed assets, except real estate assets in land and buildings, after January 1, 2018.

These purchases can be deducted when calculating Chinese corporate income tax on an accelerated lump sum basis, provided that the value of a single fixed asset does not exceed 5 million RMB (about 761,000 USD). The original circular was due to expire on December 31, 2020; the government, through announcement 6, granted a three-year extension until December 31, 2023.

R&D activities, super deduction for manufacturing

The so-called “super deduction” for research and development expenses is also extended for three years until December 31, 2023. This rule grants taxpayers an additional deduction of 75% for R&D expenses incurred when calculating the tax. Chinese business income tax, in addition to a deduction for actual expenses incurred.

The super-deduction applies provided that the expenses are not converted into intangible assets and included in current profit and loss. If the expenses have been converted to an intangible asset, these expenses can be amortized at the rate of 175% of the costs of the intangible assets before payment of taxes during the period.

An executive meeting of the Chinese State Council decided that effective January 1, 2021, the super-deduction for R&D will be increased from 75% to 100% for manufacturing companies.

Under this new rule, for example, for every million that a manufacturing company spends on R&D activities, it will receive a deduction of two million when calculating its Chinese corporate income tax.

This policy is exciting news for multinational manufacturing companies, which are expected to save around $ 12.3 billion in taxes in 2021.

This policy is exciting news for multinational manufacturing companies, which are expected to save around $ 12.3 billion in taxes in 2021.

According to Announcement No.6, value-added tax will continue to be reimbursed in full for research and development institutions funded by domestic and foreign funds that purchase Chinese domestic equipment from January 1, 2019 to December 31, 2023. The announcement extended the original expiry date of this measure by three years, which was December 31, 2020.

Corporate financing

According to the announcement, several preferential tax policies benefiting business financing are extended until December 31, 2023.

First, a rule is extended that allows interest-free loans between entities in a group (including the corporate group entity itself) to be exempt from VAT.

In addition, interest income earned by financial institutions through the provision of small loans, a loan with a line of credit of RMB 10 million (about USD 1.52 million) or less, to small businesses , micro-enterprises and individual industrial and commercial households are exempt from VAT

In addition, loan contracts between financial institutions and small and microenterprises will continue to be exempt from stamp duty.

Reserve deduction policies of insurance companies, finance guarantee institutions (credit) for small and medium enterprises, securities companies, futures companies, banks, finance companies, credit unions urban and rural, leasing companies and other financial enterprises in the calculation of Chinese business income tax will continue to be effective after their original expiration date of December 31, 2020.

Energy sector

From the date of the opening of the crude oil futures market to foreign investors until December 23, 2023, the investment income of foreign individual investors from Chinese crude oil futures contracts will be exempt from tax. personal income. This temporary measure aims to support the opening of the futures markets for crude oil and other commodities.

According to Announcement No.6, the resource tax on shale gas (based on the specified tax rate of 6%) will be reduced by 30% from April 1, 2018 to December 31, 2023, an extension of almost three years compared to the initial fiscal policy which sets the expiration date on March 31, 2021. The government’s objective is to promote the development and use of shale gas and to effectively increase the supply of natural gas .

Entertainment, aircraft, care for the elderly, medical

Announcement 6 also extends certain preferential tax policies until December 31, 2023, applicable to special industries such as the animation industry, the aviation industry, senior care facilities and medical institutions. .

In addition, the preferential tax policies relevant for the relocation of poverty-stricken populations for the purpose of poverty reduction and Taiwanese residents working in the Pingtan Global Experimental Area have been extended until December 31, 2025.

Finally, if certain taxes (which may be reduced or exempted in accordance with preferential tax policies) have been paid before the date of enactment of Ad No. 6, then those taxes paid may be deducted from future tax payable or be reimbursed accordingly.

  • Hengka (Henry) JI is a partner at Zhong Lun law firm in Beijing.

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