Tax Exemptions for Foreign-Funded R&D Centers in China Clarified

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Mar. 30 – China’s Ministry of Commerce, Ministry of Finance, General Administration of Customs and State Administration of Taxation jointly issued a circular on March 22 clarifying tax exemptions and refunds for foreign-invested research centers purchasing equipment in China.

The circular defines the relevant items related to import duty exemptions for foreign-invested research centers importing products for the development of science and technology as well as value-added tax refunds for purchases of domestic facilities.

The announcement aims to encourage foreign investment in R&D centers. It stipulates that “provinces, autonomous regions, municipalities, cities with independent planning business departments, financial departments…are directly under the supervision of the Customs Department and should determine filing dates based on the local conditions.” Foreign-funded R&D centers shall submit applications and the relevant materials to the authorities for approval.

The authorities will review foreign-funded R&D centers every two years and can cancel tax exemptions for those no longer meeting the following criteria:

  • Foreign-funded R&D centers should be approved and confirmed by the commercial department in accordance with relevant provisions
  • For foreign-funded R&D centers operating as independent legal entities, the total amount of investment shall equal the sum stated in the approved certificate for enterprises with foreign investment
  • For the newly established foreign-funded R&D centers operating for less than two years, the total amount of research and development funds shall refers to the total investment of the foreign enterprises in the past two years specially dedicated to the establishment and construction of certain assets, including upcoming signed contracts
  • The research and development expenses refer to the annual average expenses based on the past two years; and cash and asset investment should be no less than 60 percent
  • When calculating the total original value of the equipment purchased, enterprises should include the equipment purchased both overseas and domestically, as well as the signed purchased contracts for delivery by the end of 2010

For more information on tax exemptions for foreign-funded R& D centers in China, contact Sabrina Zhang, the national tax partner for Dezan Shira & Associates at tax@dezshira.com.