The income tax reduction for high and new technology enterprises (HNTEs) is a key tax incentive available under current China tax laws and plays an important role in encouraging investment in high-tech and R&D areas. In late January 2016, the Ministry of Finance, the State Administration of Taxation, and the Ministry of Science and Technology jointly issued the new Administrative Measures for Certification of High and New Technology Enterprises Circular (Circular 32), which significantly changes the HNTE certification rules and came into effect as of 1 January 2016.
Circular 32 lowers the criteria for qualifying as an HNTE, but at the same time enhances the requirements for intellectual property ownership as well as compliance.
The key implications for HNTEs are summarized as follows:
1. Ownership of core intellectual property
A qualified HNTE shall maintain ownership of the technological intellectual property that is essential to the enterprise's production of products or provision of services. Such ownership may derive from proprietary R&D, purchase, donation, acquisition or other means, but intellectual property made available to an enterprise through an exclusive licensing arrangement would no longer qualify.
2. R&D personnel requirements
The requirement that a company have a minimum percentage of R&D personnel is now lowered to 10 percent of the enterprise's total employees, compared with the previous minimum, which was 30 percent of the total employee numbers. At the same time, it is no longer required that each qualified R&D employee hold a college diploma.
3. R&D expense requirements
The R&D expense ratio requirement is lowered from 6 percent to 5 percent for small and medium sized enterprises with an annual sales revenue less than RMB50 million. The R&D expense ratios for enterprises with an annual sales revenue between RMB50 million and RMB200 million, and enterprises with an annual sales revenue above RMB200 million, remain unchanged at 4 percent and 3 percent respectively.
4. Application documents
The required application documents remain similar to those set out in the previous rules, but now include income tax filing records from the last three years.
5. Strengthened compliance requirements
Under Circular 32, certified HNTEs are now required to conduct an annual recordal with the authorities, providing the year’s intellectual property status, R&D personnel, R&D expenses, sales revenue and other information. Where an HNTE fails to meet the prescribed criteria in a particular year, or where an HNTE fails to conduct the annual recordal for two years, the HNTE qualification will be revoked and the income tax benefit received in the relevant years may be clawed back. In addition, Circular 32 requires the authorities to conduct random reviews and investigations on certified HNTEs.
Circular 32 also provides that the administrative guidelines for HNTE certification will be updated and re-issued for implementation of the new rules.
It is generally expected that the above changes will be further expanded in the updated guidelines, and the eight business areas eligible for application of HNTE benefits may be expanded.