High/New Technology Enterprises

Over the past few months, the State Administration of Taxation (SAT) has been issuing guidance on the new Unified Enterprise Income Tax which became effective on 1 January 2008.

The latest guidance concerns the definition of High/New Technology Enterprises. This was released on 14 April 2008, along with a ¡§Catalogue of High/New Technology Supported by the State¡¨ (the Catalogue) by the Ministry of Science and Technology, Ministry of Finance and State Administration of Taxation. With a retroactive date of 1 January 2008, the measures provide a standard procedure and qualification measures for assessing the High/New Technology Enterprise status of a company.

A qualifying company can enjoy a reduced tax rate of 15% compared to the standard rate of 25%. A qualifying company set up after 1 January 2008 in either of the Shenzhen, Zhuhai, Shantou, Xiamen and Hainan special economic zones, or the Shanghai Pudong new zone can also further enjoy a ¡§2-year exemption and 3-year half rate reduction¡¨ tax holiday.

Given this potentially very favourable tax treatment, companies should be critically assessing whether they qualify and if not, whether they can take steps to qualify.

Governing authorities
According to the measures, the government authorities in charge of assessing whether a company qualifies as a High/New Technology Enterprise are the Ministry of Science and Technology, Ministry of Finance and State Administration of Taxation at provincial or equivalent levels. An assessment agency will be jointly established by the above authorities. The agency will be responsible for performing the initial review, assessment, re-assessment, approval, supervision and other related functions, including building up a ¡§High/New Technologies Enterprise Assessment¡¨ website and a pool of technology experts.

Qualifications
A qualifying company must meet ALL of the following conditions:

•	it is a resident enterprise registered in mainland China for more than one year;
•	it has ownership of the proprietary intellectual property rights for the core technology used in its major products or services within the recent three years. This core technology can be obtained by means of self-development, transfer, donation, merger and acquisition, or exclusive licensing for more than a 5-year term;
•	its products or services fall within one of the categories in the Catalogue (see below);
•	more than 30% of employees are technology staff with a college degree; in addition, more than 10% of employees are R&D staff;
•	it carries out continuous R&D activity to develop technologies, and the ratio of R&D expenses to total sales within the last three years must be at least:
		6% if the last year¡¦s sales are less than RMB50 million
		4% if the last year¡¦s sales are between RMB50 million and RMB200 million
		3% if the last year¡¦s sales are above RMB200 million
•	In addition, a minimum of 60% of the total R&D expenses should be incurred within China. For enterprises that have been registered for less than three years, the actual operating period will be used for the test.
•	more than 60% of sales or income is derived from these technologies;
•	it meets other conditions in R&D management competency, technology transferability, the numbers of core-technology, sales and assets growth rate, etc. These conditions will be clarified in the ¡§Guidance on Administrative Measures on High/New Technology Enterprises¡¨, to be released separately.

Catalogue of High/New Technology supported by the State
The Catalogue contains eight technology sectors, including:

 
Application procedures
The first step is to complete a web based self-assessment. If the conditions are met, the enterprise can apply to the assessment agency for high/new technology status.

Approval procedures
The assessment agency will announce the names of qualifying companies on the High/New Technology Enterprise Assessment website for 15 working days. If no objection is raised, an official certificate will be issued to the enterprise. The enterprise can then apply to the local SAT for a tax reduction and exemption under the relevant provisions of the new tax regulations.

If a qualifying company changes its business nature and technology activities due to merger and acquisition, re-organisation and/or change of business lines, it should report to the assessment agency within 15 days of any such change. If the enterprise fails to meet the conditions after the change, its qualifying status will be terminated in the year of change.

Certificate renewal
The certificate is valid for three years. Renewal can be applied for within the three months prior to the expiry date. The assessment agency will review the enterprise¡¦s R& D activities in the past three years, along with other required documents to decide whether the enterprise still qualifies for the status.

Penalties for misconduct
The high/new technology status will be cancelled if an enterprise is found to have provided false information when submitting their application for high/new technology enterprise status; committed tax evasion or tax crimes; have serious safety or quality incidents; or have carried out illegal activities.

If an enterprise¡¦s status is cancelled due to any of the above, the enterprise is not allowed to re-apply for the favourable status within five years.

Grant Thornton insight
High/New Technology Enterprises are one of the few sectors eligible for a reduced income tax rate of 15% under the new corporate income tax law. The measures and Catalogue have now provided clear guidelines on the application procedures and qualification measurements for enterprises that wish to apply for this status. Foreign investors engaged in technology sectors should review their current business operations to explore the possibility of fitting in as a qualifying company to enjoy the tax benefits.

It should be noted that further guidance will be forthcoming, which will contain more details regarding the implementation of the measures.
¡@

Gary James
Tax Services
gary.james@gthk.com.hk