One of China’s key tax policies to foster entrepreneurship and innovation is to reduce the corporate income tax rate from 25% to 15% for enterprises that qualify as high and new technology enterprises (HNTEs). The HNTE status is granted by provincial tax authorities in accordance with the Administration Rules on Accreditation ofHigh and New Technology Enterprises issued in 2008 (Old Rules) and the related Work Guidance on Accreditation of HNTEs (Old Guidance). On January 29, 2016, the Ministry of Science and Technology (MST), Ministry of Finance (MOF) and State Administration of Taxation (SAT) jointly issued a new version of theAdministration Rules on Accreditation of High and New Technology Enterprises (GuoKeFaHuo  No. 32) (New Rules) which are retroactively effective since January 1, 2016.
The main changes brought by the New Rules are related to the accreditation conditions and procedure, scope of High and New Technology Fields Particularly Supported by the State1 (HNT Fields), and post-accreditation supervision and administration. These revisions have been briefly summarized below.
Adjustment of Accreditation Conditions
Research and Development (R&D) Expenditures Ratio
Under the New Rules, for enterprises with sales revenue equal to or less than RMB50 million in the immediately preceding year, the minimum ratio of its total R&D expenditures over its total sales revenue (R&D Expenditure Ratio) during the immediately preceding three years was reduced from 6% to 5%. The R&D Expenditure Ratio for the other two types of enterprises (i.e. with sales revenue for the immediately preceding year between RMB50 million and RMB200 million or above RMB200 million) remains unchanged under the New Rules. This change is clearly directed at allowing more small-scale enterprises to benefit from the HNTE policies.
Technology and R&D Personnel Requirements
The requirements in relation to R&D personnel are more relaxed under the New Rules. The wording of the requirements has been changed from “the number of technical personnel with a college degree should be more than 30% of the overall number of employees, and the number of employees engaged in R&D works should be more than 10% of the overall numbers of employees” to “the number of technical personnel engaged in R&D and relevant technological innovation works should be no less than 10% of the overall number of employees.” The removal of the college degree requirement and relaxation of the technical personnel ratio have been adapted to take into consideration the current R&D outsourcing practices, which shall benefit all types of enterprises.
Intellectual Property Rights (IPRs) Requirements
Previously, one of the conditions to be qualified as a HNTE was that the “enterprise shall have obtained independent IPRs for the core technology of its main products (or services) for the last three years either through self-R&D, transfer/purchase, donation, merger and acquisition, etc., or through an exclusive license agreement for more than five years.” Under the New Rules, “enterprises shall have obtained ownership of IPRs for the key supporting functions of its main products (or services) through self-R&D, transfer/purchase, donation, merger and acquisition, etc.” The elimination of the practice whereby IPRs are obtained by way of exclusive license can be interpreted as an encouragement of self-R&D in the IPR area, which could be seen as the overall direction of HNTE policies. It is also worth noting that the qualifying words of “in the last three years” were deleted, hence removing the time constraint.
Under the Old Rules, one of the accreditation conditions was that “indicators such as organization and management capacities on R&D, ability to commercialize technology findings, number of independent IPRs owned, and growth in sales and total assets shall conform to the requirements specified in the Old Guidelines.” Under the New Rules, requirements of the aforesaid four indicators were simplified to “evaluation of enterprises’ innovation capacity shall meet relevant requirements.” As the new guidelines will be separately issued in the near future, we believe that more detailed guidance on the definition of “innovation capacity” shall be provided.
Safety and Quality Requirements
Nowadays, work safety and environmental protection have become prominent issues in China. As a result, a new requirement that “no serious safety or quality accidents or serious illegal environmental activities for the immediately preceding year has taken place at the time of enterprises’ application for accreditation” was added under the New Rules.
Changes to Accreditation Procedure
Additional supporting documents—there are more application documents to provide under the New Rules, such as annual declaration and payment receipt of corporate income tax for the past three years, relevant documents related to commercialization of technology findings and organization and administration on R&D, key technologies and technology indicators of high and new technology products (or services), certification and accreditation documents and related qualification certificates, etc.
Shorter notification period—the publication notification period for accredited HNTEs was shortened from 15 to 10 working days.
Annual disclosure—under the New Rules, accredited HNTEs are required to make annual filings on the website of the Administration of Verification of HNTEs 2 to disclose detailed information such as intellectual property, technology personnel, R&D expenditure and sales revenues in the immediately preceding year.
Abolition of the renewal procedure—the Old Rules allowed enterprises to renew their application, up to three months before the expiration of their HNTE certificate, with the local competent authority, which would only focus on the R&D Expenditure Ratio condition during the renewal review process. This renewal procedure option was removed in the New Rules, which implies that a fresh application must be submitted when the HNTE certificate expires. This is more complicated than the renewal procedure as all accreditation conditions will be reviewed by the local competent authority.
Expansion of HNT Fields
The scope of HNT Fields was substantially expanded with the addition of a few new industries and technologies such as smart city, cloud computing technologies, graphene material and additive manufacturing etc., while some out-of-date technologies were deleted from the list.
Strengthening the Post-accreditation Supervision and Administration
Post-accreditation supervision and administration were strengthened in the New Rules, enabling MST, MOF and SAT to perform random checks and implement key inspection mechanisms to strengthen the supervision of the verification work of HNTEs. HNTE-accredited enterprises failing the relevant authorities’ check of their daily administrative work shall be subject to a re-accreditation procedure. The HNTE qualification of enterprises who fail to pass the re-accreditation procedure will be revoked and tax incentives that had been enjoyed by such enterprises during the relevant unqualified period shall be refunded to the local tax authority.
The New Rules continue to provide tax incentives to HNTEs. Although there is limited relaxation of accreditation conditions and procedures (particularly for small-scale enterprises), the accreditation work on HNTEs and post-accreditation administration on HNTEs were strengthened overall.