China’s Ministry of Finance and State Administration of Taxation jointly released Cai Shui  Number 38 (Notice 38), describing new corporate income tax policies for key industries in the Lingang New Area of the Shanghai Free Trade Zone (New Area).
In July of this year, China’s Ministry of Finance and State Administration of Taxation jointly released Cai Shui  Number 38 (Notice 38), describing new corporate income tax policies for key industries in the Lingang New Area of the Shanghai Free Trade Zone (New Area).
Pursuant to a 2019 notice of the State Council, Notice 38 details use of a preferential tax incentive to further promote the development of high technology manufacturing and research within the New Area. The notice is retroactive to January 1, 2020.
Notice 38 provides for a 15% corporate income tax rate for a period of five years from the registration date of any qualified business engaged in substantive production and/or R&D activities related to integrated circuit technology, artificial intelligence technology, biomedical technology, civil aviation technology and other similar high technologies.
To be considered as substantive, the activities mut be carried out in fixed production and business premises with a fixed staff, and must possess software and hardware support that is compatible with the production or R&D activities.
A qualifying business must also sell or perform R&D on at least one key product/technology that is indispensable in the industry chain.
The notice does specify that in order to qualify for the full 5 years of the reduced tax rate, a qualifying business must be registered in the New Area anytime from January 1, 2020 onward.
Companies registered before 2020 may still enjoy the incentive, but only up thru the fifth year after the date of registration. It should be noted that, even if otherwise qualified, companies that relocate from other regions outside the New Area shall not be afforded the incentive.
In addition to the above, at least one of the following criteria must be met in order to be a qualified business:
1. The investors in the business rank high in both technical strength and influence in the international market;
2. The investors in the business take a leading position and show technical strength in the domestic market;
3. The company has leading talent and shall have engaged in scientific research and production in relevant fields at home and abroad;
4. The company possesses core technology and is capable of establishing independent intellectual property rights with respect to its main products;
5. The company has the ability to promote the diversification of core suppliers in the industrial chain and drive the upgrading of domestic industries;
6. The company has high-end supply capacity;
7. The company’s R&D achievements, technologies or products have been adopted by the international and domestic front-line terminal equipment manufacturers, or the enterprise shall have carried out close substantive cooperation (including capital, scientific research, project, etc.); or
8. The enterprise shall have obtained national or provincial government technology or industrialization special funds, government investment funds or investment from well-known investment and financing institutions.
In conclusion, while the tax incentive offered under Notice 38 is not permanent, it is further indication that China is serious about attracting high technology businesses into its free trade zones and the country at large.
This effort has been underway since the Shanghai Free Trade Zone was first established in 2013, and throughout the following period in which many of the special policies there rapidly spread to the nation as a whole, as well as to other new special technology parks and free trade zones. It is thus expected that the tax incentive now in force in the New Area will roll out to other areas of the country in due time.
For more information, please contact:
Director of Global Expansion & Tax Advisory
Nexia TS Shanghai
Dr Scott Heidecke
Nexia TS Shanghai