Key Points:  

  • Circular 4 renews a number of existing tax preferential treatments and introduces new incentives
  • China's Ministry of Finance, State Administration of Taxation and related departments are expected to issue further guidance

On 28 January 2011 the State Council published a circular titled “Certain Policies for Further Encouraging the Development of the Software Industry and Integrated Circuit Industry” (GuoFa [2011] No. 4) (Circular 4). Among the highlights, Circular 4 renews and extends certain tax benefits for software and integrated circuit enterprises. Some of the key tax incentives are summarized below:  

  • The VAT incentive under “Several Policies of the State Council on Encouraging the Development of the Software Industry and Integrated Circuit Industry” (State Council [2000] No.18) (Circular 18), which expired at the end of 2010, will be extended. According to Circular 18, payers of general VAT will receive a refund of any VAT liability in excess of the effective rate of 3 percent for any sale of self-developed and manufactured software products.
  • Qualified software enterprises and integrated circuit enterprises will be eligible for business tax exemption on income derived from software development and testing, information system integration, consulting and operation maintenance, and integrated circuit design services. The Ministry of Finance and State Administration of Taxation will formulate detailed measures.
  • Certified integrated circuit manufacturing enterprises with integrated circuits of no more than 0.8 micrometers will receive tax exemption for two years starting from the first profit-making year, and a 25-percent statutory rate (half the regular rate) for the following three years (“two-year exemption and three-year half reduction”).
  • Certified integrated circuit manufacturing enterprises with integrated circuits of no more than 0.25 micrometer or with total investments of more than RMB 800 million are entitled to a reduced corporate income tax rate of 15 percent. If the enterprise has been in operation for more than 15 years, it will receive tax exemption for five years starting from the first profit-making year, and a 25-percent statutory rate (half the regular rate) for the following five years (“five-year exemption and five-year half reduction”).
  • State-approved key integrated circuit projects will be eligible for special measures to resolve cashflow problems arising out of their inability to absorb input VAT as a result of centralized procurement activity. The Ministry of Finance and related departments will formulate detailed measures.
  • Upon certification, newly established integrated circuit design enterprises and qualified software enterprises are entitled to “two-year exemption and three-year half reduction” corporate income tax preferential treatment starting from the first profit-making year. Materials imported by certified integrated circuit design enterprises and qualified software enterprises will receive bonded treatment.
  • Qualified integrated circuit design enterprises falling under the state planning framework will receive the same tax incentives available to key software enterprises falling within the state planning framework provided under Circular 18. The National Development and Reform Commission shall formulate separate measures.
  • Qualified integrated circuit packaging, testing and key and specialized materials manufacturing enterprises and special integrated circuit equipment manufacturing enterprises will be eligible for certain tax incentives. The Ministry of Finance and State Administration of Taxation will formulate detailed measures.

Circular 4 provides that the tax incentives will be adjusted from time to time to reflect developments in the software and integrated circuit industries. In any event, “two-year exemption and three-year half reduction” and “five-year exemption and five-year half reduction” benefits will expire by 31 December 2017. If an enterprise is eligible for corporate income tax incentives in addition to Circular 4 benefits, it must choose the one that is most preferential.

Circular 4 renews a number of tax preferential treatments available under Circular 18 and introduces certain new tax incentives. It reaffirms the Chinese government’s determination to develop and promote the software and integrated circuit industries, an effort that is in line with the country’s 12th five-year plan. For some tax benefits, Circular 4 provides only a framework, and it is expected the Ministry of Finance, State Administration of Taxation and related departments will issue detailed regulations to offer further guidance.