On January 29, 2016, the State Administration of Taxation, the Ministry of Finance and the Ministry of Science and Technology jointly issued the Revised Measure for Certification of High and New Technology Enterprise (Guo Ke Fa Huo  No. 32) (the “Revised Measure”). The Revised Measure is an amendment to the Measure for Certification of High and New Technology Enterprise issued in 2008 (the “Old Measure”). The Revised Measure reduces certain qualification thresholds for High and New Technology Enterprise (“HNTE”) and expands the ambit of “high and new technology” in an effort to support the development of small and medium size high tech companies and encourage the innovation of new technologies in light of the changing environment. In addition, the Revised Measure introduces a number of new requirements to strengthen the supervision and administration of HNTE incentive. As a background information, the existing corporate income tax rate in China is 25%, company certified as HNTE is entitled to a reduced corporate income tax rate of 15%.
The major changes under the Revised Measure are summarized as follows:
- The Old Measure requires applicant to have IP ownership in the core technology of its major products or services through R&D, transfer, gift, merger and acquisition in recent three years or through exclusive license for such IP for more than five years. The Revised Measure removes the three year limitation and clarifies the “IP” referenced in the Revised Measure to mean those IPs having a central supporting role for the development of technology for the major products or services of applicant. Unlike the Old Measure, the Revised Measure does not recognize the acquisition of IP ownership by applicant through exclusive license, the only legitimate means to obtain IP ownership is by means of R&D, transfer, gift and merger and acquisition.
- The Revised Measure lowers certain qualification thresholds of HNTE. For example, pursuant to the Old Measure, at least 30% of the employees of applicant must be technical personnel holding a college diploma or a higher degree and at least 10% of such employees must engage in R&D activities, however the Revised Measure only requires 10% of the employees to engage in R&D activities and technology innovation and imposes no further requirements in this regard. The Revised Measure reduces the R&D expense requirement for applicant with annual sales of less than RMB50 Million from 6% to 5% i.e. applicant with annual sales of less than RMB50 Million must spend at least 6% of its annual sales revenue on R&D activities. The R&D expense requirement remains at 4% and 3% for applicant with annual sales between RMB50 Million and RMB200 Million and annual sales above RMB200 Million.
- Another major change to the Revised Measure is the expansion of ambit of “high and new technology” to include such new technologies as cloud computing technology, e-business and modern logistics technology and new energy automobile related technology. This amendment is an obvious attempt to stay current with the development of new technologies.
- The Revised Measure makes certain adjustments to the application procedures. In addition to the application documents stipulated in the Old Measure, applicant needs to submit the corporate income tax return for the recent three accounting years. Upon certification, applicant must submit by the end of May each year information about its IP, technical personnel, R&D expense and operating income of the prior year (“Status Information”). The HNTE status is valid for three years. Under the Old Measure, applicant can file “renewal review” application to extend its status and such renewal review is usually simpler and less stringent. The Revised Measure abolishes such renewal review and requires applicant to launch a new application which will subject applicant to the same level of scrutiny as if they were first time applicant in order to extend its HNTE status.
- The Revised Measure introduces a new “supervision and administration” chapter, which requires the Ministry of Science and Technology, the Ministry of Finance and the State Administration of Taxation to establish an audit and inspection mechanism to supervise and administer the certification of HNTE. If a company which has been certified as HNTE is subsequently determined to be unqualified, its HNTE status will be canceled and tax incentive enjoyed by the company will be recaptured for the year in which the company is unqualified. As compared to the Old Measure, the Revised Measure revokes HNTE status only when serious violation occurs. According to the Revised Measure, the HNTE status will be revoked under the following circumstances: (i) applicant commits serious fraudulent conduct in the application process; (ii) occurrence of significant safety or product accident or serious environmental violation; (iii) applicant fails to report in a timely manner significant change of circumstances relating to the certification requirement or has failed provide the Status Information for two years.