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Loss carry-forward period extended to 10 years for High Tech Companies

China's Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly released on July 11, 2018 the "Circular on Extending the Length of Years for High-tech Enterprises and Technology-oriented Small- and Medium-sized Enterprises to Carry Forward Their Losses" Caishui [2018] No. 76

According to the Circular 76, the 5-year-loss carry forward period is extended to 10 years for High Tech and New Technology Enterprises (HNTEs) and Technology-based Small and Medium-sized Enterprises (TSMEs).

Under the Corporate Income Tax Law, tax losses can be carried forward for five years. Circular 76 extends the current 5-year loss carryforward period to 10 years for an enterprise identified as an HNTE or TSME in the current year, if the entity has tax losses incurred within the 5 preceding years. Circular 76 benefits foreign-invested enterprises that make substantial investments in technologies developments, as these enterprises typically sustain large losses in the initial investment periods. Allowing a longer loss carryforward period enables the enterprises to utilize more losses against future profits.

However, there are some uncertainties regarding the implementation of Circular 76, such as whether a change/cessation of HNTE status for the enterprise affects the utilization of tax losses in the years after the status change, requiring clarification by the SAT.

The Circular will take effect rectroactively, as of January 1, 2018.

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