R&D extra – deduction to be increased in 2021

In order to promote technological development and innovation, Chinese authorities have provided since several years tax incentives for the expenses incurred by manufacturing enterprises on R&D activities.

The Company Income Tax Law of China (CIT Law) provides an extra deduction for R&D expenses incurred by an enterprise during the development of new technology, new products, and new techniques. Also, the Implementing Rules of the Company Income Tax of China specifies that such R&D expenses that are not capitalized as intangible assets but that are charged into the P&L of the period in which they are incurred, an extra – deduction of 50% of the actual amount incurred is allowable when computing the taxable income.

The Circular [2018] No. 99 issued by the Ministry of Finance and the State Administration of Taxation on “Raising the proportion of pre-tax extra – deduction of R&D expenses” increased the extra – deduction for R&D expenses to 75% of the actual amount from January 1st, 2018 to December 31st, 2020.

On March 24th, 2021, the executive meeting of the State Council, in line with the plan discussed during the Two Sessions, decided to raise, from January 1st, 2021, the extra – deduction for R&D expenses from 75% to 100%, meaning that a company could deduct 2 million RMB from the taxable income for every 1 million RMB spent on R&D.

Also, enterprises engaged in the R&D expense could benefit from the new policy not only at the time of the annual CIT settlement (May of the following year) but already at the time of the CIT prepayment in October.

We look forward to further communications from the tax authorities about the new policy, which is expected to lower the enterprises' tax burden by 80 billion RMB this year.