The Circular on Improving the Policy on Extra Pre-tax Deduction of Research and Development Expenses (the "Circular") would be taken into effect on 1 January 2016

In order to encourage the domestic R&D, recently, the Ministry of Finance, SAIC, the Ministry of Science and Technology have jointly promulgated the “Circular”. Based on No.116 GUO SHUI FA [2008] and No.70 CAI SHUI [2003] (hereinafter refer to the “Old Policies”), the “Circular” has further prescribed the requirements on the details of the expenses and the control on the amortization of the expenses, which mainly includes:

To expand the scope of the items which could be deducted

The scope of R&D: the “Circular“has prescribed the “negative list”, in which it has sets out the activities and industries to which the pre-tax deduction policy does not apply.

The scope of the R&D expenses: the “Circular“has added the details of the other directly relevant expenses, for example, the book fee; translation fee; consultant fee for the experts; insurance fee for the high technology R&D; the expenses related to the R&D results, such as the fee for retrieval, analysis, discussion, review, appraisal, examination, evaluation, and acceptance; the expenses related to the application of IP, such as the fee for application, registration and agent; the travel expenses, the cost for organizing meetings and etc.. The whole amount of such expenses shall be no more than 10% of the actual amount incurred and be calculated and subject to extra deduction.

The principle for the commissioned R&D

In order to implement the commissioned R&D smoothly, the “Circular“has prescribed that the consignee shall provide the details of the R&D expenses to the consiger while the consignee is the affiliate of the consigner. Compared with the “Old Policies”, the “Circular“has narrowed down the cope of consignee who shall provide the details of R&D expenses.

In order to control the amortization of the expenses, the “Circular“has prescribed that the commissioned R&D expenses shall be included in the R&D expenses of the enterprise at 80% of the actual amount incurred and be calculated and subject to extra deduction, and the consignee shall not apply the extra deduction again.

In order to encourage the domestic R&D, the “Circular“has prescribed that if the consignee is a foreign entity or individual, then the relevant expenses could not be deducted.