/Setting up an R&D Center in China

Setting up an R&D Center in China

<span style=”font-weight: 400;”>The Chinese government is putting great emphasis on indigenous innovation as a driver of future economic growth and national prestige (as demonstrated by the 13</span><span style=”font-weight: 400;”>th</span><span style=”font-weight: 400;”> five-year plan covering 2016-2020). It is, therefore, encouraging the establishment of R&amp;D centers within the country by offering a variety of incentives.  In 2016, the Ministry of Finance, General Administration of Customs, and the State Administration of Taxation announced that imported equipment for scientific research would be duty-free.  The regime for R&amp;D tax incentives has been standardized in recent years, though R&amp;D tax filing is still a complex undertaking for businesses.</span>

 

<span style=”font-weight: 400;”>In addition to a variety of tax incentives, businesses that relocate R&amp;D activities to China benefit from the lower cost of technical staff, engineers, skilled workers, and researchers (though such costs are rising rapidly).  Hiring locally for R&amp;D centers also brings local expertise into the product development center of a China-based operation.</span>

 

<span style=”font-weight: 400;”>Businesses also have the benefit of gaining a deeper foothold in the country by setting up centers to develop products that are tailor-made for the local market.  As the Chinese consumer market can be notoriously difficult for foreign companies to break into or succeed in over the long-term, local R&amp;D centers can improve the product development process to ensure long-term success in China.  Many American businesses, such as Microsoft and Coca Cola, have relocated R&amp;D activities to China for this reason.</span><span style=”font-weight: 400;”>[1]</span>

 

<img class=”size-medium wp-image-18619″ src=”https://ins-globalconsulting.com/wp-content/uploads/2018/06/6053042920_f5d01173fb_b-300×200.jpg” alt=”” width=”300″ height=”200″ /> Lab Technician Using Pipette — Image by © moodboard/Corbis

 

<span style=”font-weight: 400;”>Foreign companies may establish R&amp;D centers either as wholly-foreign owned enterprises or as a joint-venture. R&amp;D centers can be involved in a wide range of activities including high-technology, biotech, natural sciences, pharmacology, AI, and others.  Non-eligible industries include entertainment, real estate, wholesale and retail, commercial services, hospitality, and tobacco manufacturing.</span><span style=”font-weight: 400;”>[2]</span><span style=”font-weight: 400;”>  The R&amp;D center must be somehow dedicated to the development of new knowledge or applications.  It may not be involved in production, other than that in support of its core R&amp;D activities.</span>

 

<span style=”font-weight: 400;”>The </span><b>minimum investment requirement </b><span style=”font-weight: 400;”>for an R&amp;D center is USD 2 million.  Tax authorities require that the funds be entirely dedicated to the activities of the center.  Only 70% need to come in the form of registered capital while the rest can come from loans or other sources.</span>

<h2><span style=”font-weight: 400;”>Tax Incentives to Establish an R&amp;D Center</span></h2>

<span style=”font-weight: 400;”>Equipment and parts used in the R&amp;D facility will be exempt from import tariffs and value-added tax.  To qualify for the exemption, imported equipment may not be used for mass production. Qualified R&amp;D expenses receive a tax deduction of 150% (super deduction).  Earnings from technology developed at the facility are exempt from business tax.</span>

<h2><span style=”font-weight: 400;”>Eligible Activities</span></h2>

<span style=”font-weight: 400;”><img class=”alignright size-full wp-image-18617″ src=”https://ins-globalconsulting.com/wp-content/uploads/2018/06/images.jpeg” alt=”” width=”277″ height=”182″ />In order to enjoy preferential treatment, R&amp;D centers must be focused on dedicated scientific or technological development activities. R&amp;D centers should be engaged in any of the following:</span>

<ul>

<li><span style=”font-weight: 400;”>      Creative application of new knowledge in science and technology</span></li>

<li><span style=”font-weight: 400;”>      Research to significantly improve technologies or products</span></li>

<li><span style=”font-weight: 400;”>      Obtaining new scientific and technical knowledge</span></li>

<li><span style=”font-weight: 400;”>      Ongoing and systematic programs</span></li>

</ul>

<span style=”font-weight: 400;”>Activities not eligible for exemption include repetitive or basic upgrades to existing products, management studies, quality control analysis, or research in the social sciences.</span>

<h2><span style=”font-weight: 400;”>Qualified Expenses</span></h2>

<span style=”font-weight: 400;”>Business Expenses that qualify for R&amp;D Tax Incentives Include (but are not limited to) the following:</span>

<ul>

<li><span style=”font-weight: 400;”>      Remuneration for R&amp;D Personnel (salaries, housing fund, social insurance)</span></li>

<li><span style=”font-weight: 400;”>      Expenses for technical raw materials used in R&amp;D processes</span></li>

<li><span style=”font-weight: 400;”>      Depreciation of R&amp;D equipment</span></li>

<li><span style=”font-weight: 400;”>      Amortization of intangible assets</span></li>

<li><span style=”font-weight: 400;”>      Related Certification Expenses</span></li>

</ul>

<span style=”font-weight: 400;”>Government officials are diligent in weeding out applications that appear to exploit tax incentives without honoring the spirit of the policy, which is to generate research and development activity.  Applications for R&amp;D incentives that do not correctly identify eligible activities are frequently rejected. Applications for R&amp;D centers that do not have dedicated full-time staff will likely also be rejected.  It is advisable for companies to develop familiarity with their local tax bureaus. This will smooth out the administrative process, while keeping up to date with local policy changes affecting R&amp;D.</span>

<h2><span style=”font-weight: 400;”>Filing R&amp;D Expenses</span></h2>

<span style=”font-weight: 400;”><img class=”alignright size-medium wp-image-18618″ src=”https://ins-globalconsulting.com/wp-content/uploads/2018/06/Lenovo_Beijing_RD_Campus-300×225.jpg” alt=”” width=”300″ height=”225″ />Companies should file a Form for Enterprise Income Tax Incentives documenting all relevant R&amp;D tax costs along with R&amp;D project documents.  This should be submitted no later than the annual settlement tax declaration. In case of an audit or inspection, companies should maintain the following documents on file:</span>

<ul>

<li><span style=”font-weight: 400;”>      Proposals for all R&amp;D projects</span></li>

<li><span style=”font-weight: 400;”>      Statements of approval for all R&amp;D projects</span></li>

<li><span style=”font-weight: 400;”>      List of R&amp;D personnel</span></li>

<li><span style=”font-weight: 400;”>      Organized team for each R&amp;D project</span></li>

<li><span style=”font-weight: 400;”>      R&amp;D project contract (this should be registered with the local science and technology bureaus)</span></li>

<li><span style=”font-weight: 400;”>      Balance sheet for R&amp;D projects</span></li>

<li><span style=”font-weight: 400;”>      Breakdown of expenses across all R&amp;D projects</span></li>

<li><span style=”font-weight: 400;”>      Justifications for all expenses as they relate to each project</span></li>

<li><span style=”font-weight: 400;”>      Other documents required by local tax authorities</span></li>

</ul>

<h2><span style=”font-weight: 400;”>Conclusion</span></h2>

<span style=”font-weight: 400;”>Many companies are relocating R&amp;D activities to China to capitalize on tax incentives, relatively inexpensive and highly-qualified technical talent, and local knowledge.  While the R&amp;D tax regime has become increasingly standardized, it remains a complex undertaking for foreign companies that are unfamiliar with it. Local rules, requirements, and incentive schemes further complicate the matter. Businesses should stay up to date with local rules to best take advantage of R&amp;D incentives and avoid non-compliance or a rejected application.</span>

 

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<span style=”font-weight: 400;”>[1]</span><span style=”font-weight: 400;”> See https://www.chinabusinessreview.com/foreign-company-rd-in-china-for-china/</span>

 

<span style=”font-weight: 400;”>[2]</span><span style=”font-weight: 400;”> See http://www.china-briefing.com/news/2017/03/02/revisiting-tax-incentives-for-rd-activities-in-china.html</span>

 

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2018-07-11T15:26:12+00:00 July 11th, 2018|

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