High-tech company rules shift focus to compliance

Jul 5, 2016
While the new regulations for high and new technology enterprises simplify status approval procedures and encourage R&D, they subject companies to closer monitoring and entail heavier compliance burdens

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The high and new technology enterprise (HNTE) program is one of China’s core innovation tax policies. Companies that qualify for HNTE status can enjoy a preferential 15% corporate income tax (CIT) rate rather than the standard 25%. The previous rules governing the HNTE status were issued in 2008 (2008 Measures), but rapid technological advancement in the last eight years has led to the industry being in dire need of an update.

On January 29 2016, the Ministry of Science and Technology, the Ministry of Finance, and the State Administration of Taxation jointly issued the Measures for the Administration of the Recognition of High and New Technology Enterprises (Revised) (New Measures), or Guokefahuo [2016] No.32. Some of the amendments have triggered heated discussions in China.

For the most part, the New Measures provide technical updates and relax the critesria for obtaining HNTE status, but they also create new post-recognition disclosure requirements to allow for closer administrative monitoring. Under this new framework, HNTEs should focus their efforts on post-recognition compliance in order to avoid risk losing their status and repaying prior tax savings.

A clearer path

The key changes to obtaining recognition of HNTE status are as follows:

Relaxed requirements

The New Measures have adjusted several assessment criteria (see Table 1). They largely benefit small and medium-sized enterprises (SMEs) and give HNTEs more freedom in their operations.

Table 1.

Items

2008 Measures

New Measures

Significance

Intellectual property (IP)

 The company must have owned the core proprietary IP rights used in its main products and/or services for the past three years. The rights have to be obtained through the company’s own R&D efforts or through a transfer, purchase, donation, M&A transaction, or an exclusive license to use the IP for at least five years. The company must own the IP that carries the core function of supporting the main products and/or services of the company from a technology perspective. The proprietary IP rights have to be obtained through the company’s own R&D efforts or through a transfer, purchase, donation, or M&A transaction. The three-year IP ownership and five-year exclusive license requirements have been abolished. This indicates the encouragement of R&D. It simultaneously avoids the abuse of the five-year exclusive license regulation, under which companies may use the same IP for different applications.

Products

 The products and/or services must fall within the scope of state-encouraged high and new technologies. Technologies that have a core function in supporting the main products and/or services of the company must fall within the scope of state-encouraged high and new technologies. The emphasis of “core function” and “main” products and/or services is more consistent with the realities of the industry. However, this leaves room for interpretation of these terms. In relation with the revenue criteria (income due to high and new technology products/services must be above 60% of the total revenue of the company), it can be inferred that the “main” products are those that contribute more than 60% of the company’s revenue.

R&D headcount

 On an annual basis, more than 30% of the total number of employees of the company must be technical personnel that hold a college diploma or higher degree, among which, R&D staff must represent 10% of the total number of employees of the company. Technical personnel engaged in R&D and relevant technological innovation activities must represent at least 10% of the total number of employees annually. The New Measures have removed the educational prerequisites and focus solely on driving industries. However, the role of being engaged in “relevant technological innovation activities” is open to interpretation.

R&D expenses

 Qualifying R&D expenses must exceed the following percentages of the company’s sales revenue for the last three fiscal years: 1) At least 6%, if the revenue is less than Rmb50 million in the most recent fiscal year; 2) At least 4%, if the revenue is between Rmb50 million and Rmb200 million in the most recent fiscal year; and 3) At least 3%, if the revenue is more than Rmb200 million. Qualifying R&D expenses must exceed the following percentages of the company’s sales revenue for the last three fiscal years: 1) At least 5%, if the revenue is less than Rmb50 million in the most recent fiscal year; 2) At least 4%, if the revenue is between Rmb50 million and Rmb200 million in the most recent fiscal year; and 3) At least 3%, if the revenue is more than Rmb200 million. The lowered threshold of the R&D expense proportion is favourable for SMEs.

Others

 The company must meet operational regulatory requirements in areas such as organization and management of the R&D activities, the ability to convert the results of research into commercial production, the number of independent IP rights owned and the growth of sales and total assets. For innovation abilities, the company must not have any significant accidents relating to the safety or quality of its products and/or services or violate any environmental laws during the year before HNTE status is granted. The term “innovation ability” is vague and further implementing rules will likely be issued soon.The New Measures also set safety, quality and environmental protection standards.

Updated high and new technologies

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