Focus: China - Technology – June 2008

New recognition procedures for high-technology enterprises in China

In brief: The Chinese Ministry of Science and Technology, the Ministry of Finance and the State Administration of Taxation have released the Administrative Measures for the Recognition of High and New Technology Enterprises which sets out the procedures and requirements for PRC enterprises to be recognised as high-technology enterprises. Under PRC tax law certain high-technology enterprises will be taxed at a lower enterprise income tax rate. Partner Campbell Davidson (view CV), Lawyer Justin Chin and Paralegal Michelle Ding report on what this entails.

• Background
• Qualification requirements
• Certification procedure
• Ongoing requirements and renewal
• Impact
• Current status

How does it affect you? If approved by the State Administration of Taxation, high-technology enterprises will be taxed at the preferential enterprise income tax rate of 15 per cent instead of the regular enterprise income tax rate of 25 per cent.

Background

On 1 January 2008, the Enterprise Income Tax Law (the EIT) took effect under which certain high-technology enterprises could benefit from the reduced enterprise income tax rate of 15 per cent. At that stage, there were no guidelines as to what constituted a high-technology enterprise for the purposes of the EIT.

On 14 April 2008, the Ministry of Science and Technology, the Ministry of Finance and the State Administration of Taxation (together, the administrative authorities) released the Administrative Measures for the Recognition of High and New Technology Enterprises (the recognition measures) which characterised and outlined the requirements of a high-technology enterprise. The recognition measures took effect retrospectively as of 1 January 2008.

It is expected that the administrative authorities will soon create recognition authorities that will be responsible for administering the recognition measures at a district level.

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Qualification requirements

To qualify as a high-technology enterprise, an enterprise must meet the requirements below.

• The enterprise must be registered in China (not including Hong Kong, Macau and Taiwan) for at least one year.
• The enterprise must have owned the intellectual property rights of the core technology that applies to its key products and/or services for the previous three years. These intellectual property rights may have been obtained by way of the enterprise's own development, purchase, exclusive licensing for a minimum period of five years or through merger and acquisition.
• The products and/or services of the enterprise must fall within the categories specified as 'State-encouraged high-new technology areas'. There are more than 200 categories of technologies, products and services in eight technology areas. Those technology areas are:
  • electronic information technology;
  • biological and new medical technology;
  • aviation and space technology;
  • new materials technology;
  • high-technology services;
  • new energy and energy conservation technology;
  • resources and environmental technology; and
  • transformation of traditional sectors through new technology.
• At least 60 per cent of the enterprise's total income for the year must have been derived from its high technology products and/or services.
• At least 30 per cent of the enterprise's employees must be technicians who hold at least a college qualification, among whom at least 10 per cent must be engaged in research and development.
• The enterprise's capital expenditure on research and development for the past three fiscal years must have been at least 3, 4 or 6 per cent of the total revenue of the enterprise (depending on the amount of revenue for the previous year).
• The enterprise's research and development expenditure in China must be at least 60 per cent of its total global research and development expenditure.
• Any other requirement specified by the recognition authorities.

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Certification procedure

To gain certification, an enterprise should first complete an online self-evaluation test which will be on a website established by the administrative authorities. Following the test, the enterprise is to submit an application letter, copies of company documents (such as the business certificate, tax registration certificate, intellectual property certificates, approval certificates for manufacturing etc.) and supporting documents that will satisfy the qualification requirements referred to above.

Experts selected by the recognition authorities will review the supporting documents and will issue an opinion on the enterprise's recognition status. If passed by the experts, the name of the enterprise will be published on a website established by the administrative authorities for 15 working days to receive comments and objections from the public. If no relevant objections are received, a certificate certifying that the enterprise is a high-technology enterprise will be issued by the recognition authorities.

Once the certificate has been issued, the high-technology enterprise may apply to the State Administration of Taxation for the reduced 15 per cent enterprise income tax rate.

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Ongoing requirements and renewal

The high-technology recognition certificate is valid for three years from the date of issue and, in order to maintain its status and certification, the high-technology enterprise must meet the qualification requirements on a continuing basis during those three years.

The high-technology enterprise must notify the recognition authorities within 15 days if there have been significant changes to the enterprise's business, manufacturing or technology activities. This includes changes through merger and acquisition, reorganisation or change of business.

Subject to a re-assessment process focusing on the qualification requirements mentioned above, the certificate may be renewed for a further three years.

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Impact

The EIT and the recognition measures provide a framework for promoting and developing specific technology industries within China. Foreign investment into China can be conducted through contractual joint ventures, equity joint ventures and wholly-owned foreign enterprises. These types of enterprises are eligible to be qualified as high-technology enterprises.

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Current status

The recognition measures are currently still being implemented and the administrative authorities are in the process of establishing the recognition authorities. As at the date of this Focus, we are not aware of any PRC enterprise that has been certified as a high-technology enterprise.

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For further information, please contact:

Campbell Davidson International Partner, Shanghai Ph: +86 21 6841 2828 Campbell.Davidson@aar.com.au		Nigel Papi International Partner, Shanghai Ph: +86 21 6841 2828 Nigel.Papi@aar.com.au
Stuart Mengler International Partner, Beijing Ph: +86 10 8515 0250 Stuart.Mengler@aar.com.au		Seamus Cornelius International Partner, Shanghai Ph: +86 21 6841 2828 Seamus.Cornelius@aar.com.au

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