Background
Before Circular 49, the old key rules were Caishui [2012] No.27 (“Circular 27”), the Notice on Corporate Income Tax Policies for Further Encouraging the Development of Software and Integrated Circuit Industries and some minor follow up supplementary policies. This is a quick summary of the main preferential tax treatment in Circular 27:
1) Manufacturers of integrated circuits with a line width of up to 0.8 micro-meters enjoyed a preferential tax treatment from their first profit-making year until 31 December 2017. During this period they were exempt from corporate income tax (CIT) in the first and second years, and were allowed a 50% tax reduction at a statutory rate of 25% in the third to fifth years
2) Manufacturers of integrated circuits with a line width of less than 0.25 micrometers or investing more than RMB 8 billion would pay CIT at a reduced rate of 15%
3) Key software enterprises and integrated circuit design enterprises listed in the State planning layout would pay CIT at a reduced rate of 10% if they did not benefit of the tax exemption in the current year.
What’s New
A. Now software companies do not need to go to the technical department to obtain the qualification license in order to enjoy the tax benefits. They only need to submit specified supporting documentations to the tax bureau for record with their annual enterprise tax filling and a separate set of documentation for record. The documentary requirements will follow the terms in the Announcement No.76 of the State Administration of Taxation in 2015.
B. Circular 49 clarifies that when software and integrated circuit enterprises do not meet the requirements for the tax preferential regime in their firs profit-making year, but meet them in later years, they will benefit of the tax reduction or exemption applied to those later years.
For example:
A software company’s first profit-making year is 2015. Provided that it satisfies the requirements the company would be exempt from CIT in years2015 and 2016, and would be allowed a 50% tax reduction at a statutory rate of 25% in years 2017-2019, and enjoy such tax reduction until the expiration of the preferential period (year 2019). If this company does not meet the conditions in 2015, but meets them in 2016, the enterprise will only be exempt from CIT in 2016, and will be allowed a 50% tax reduction at a statutory rate of 25% in years 2017-2019, and enjoy such tax reduction until year 2019
C. Circular 49 updates the thresholds to qualify for the preferential tax treatment for key software enterprises (see point 3 above). In addition to the previous requirements, companies will now also need to meet any of these two new thresholds in order to qualify:
C.1)Their annual sales revenue is no less than RMB 200 million, their taxable income is no less than RMB 10 million, and their R&D employee number is no less than 25% of their total employee number;
C.2) Within the key integrated circuit design industry, their annual sales revenue is no less than RMB 20 million, their taxable income is no less than RMB 2.5 million, R&D employee number is no less than 35% of their total employee number, and their R&D expenses in China are no less than 70% of their total R&D expenses.
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Hendersen´s View
Circular 49 continues to provide encouraging preferential tax treatments for the benefit software companies in China and follows the trends already noticed in the recent development of Chinese tax policy: simplification and transparency in approval thresholds, and providing local tax bureaus with more authority to classify, approve and follow up such preferential regimes.
