China Clarifies Preferential Tax Policies for Software Enterprises

August 13, 2013 Posted by China Briefing Reading Time: 4 minutes

Aug. 13 – China’s State Administration of Taxation released the “Announcement on Issues Concerning the Implementation of the Preferential Income Tax Policy for Software Enterprises (Announcement [2013] No. 43, hereinafter referred to as the ‘Announcement’)” on July 25, which clarifies several issues regarding the implementation of preferential tax policies for software enterprises established in the country. Detailed information can be found below.

Definition
For the purpose of the Announcement, several terms have been defined as below:

“Recognized software enterprises” refers to enterprises which have been recognized by software enterprise recognition institutions in accordance with relevant provisions, and have obtained the appropriate software enterprise recognition certificates.

“Total income of a software enterprise” shall be the sum of income in monetary and non-monetary forms received by an enterprise from various sources, including:

Income from the sale of goods;
Income from the provision of labor services;
Income from the transfer of property;
Income from equity investment, such as dividends and bonuses;
Income from interest;
Rental income;
Income from royalties;
Income from donations; and
Income from other sources.

“Profit-making year of a software enterprise” refers to the first taxable year in which the taxable income of the enterprise is greater than zero.

According to the Announcement, the preferential income tax policies apply to recognized software enterprises in the country whose tax is levied according to their accounting books. Moreover, the period for software enterprises to enjoy regular tax reductions and exemptions shall be calculated continuously and shall not be suspended due to profit loss or other reasons.

Preferential Tax Policies
Software enterprises that have been established in China before December 31, 2010 but have not yet been recognized by the state shall go through the relevant procedures according to the Recognition Standards and Administrative Measures for Software Enterprises, and shall continue to enjoy the following preferential policies until the expiry thereof:

Valued-added taxes refunded upon collection obtained by software enterprises shall be used for software R&D and production expansion, and such taxes shall not be treated as taxable income for the purposes of collecting corporate income tax.
Corporate income tax of newly-established software enterprises (which have been recognized by the state) shall be exempt for the first and second profit-making year, and shall be levied at half for the third to fifth profit-making year.
Key software enterprises included in the national plan that have not enjoyed tax exemption preferences in the current year may pay corporate income tax at a reduced rate of 10 percent.
Training expenses for employees of software enterprises may be deducted during the calculation of taxable income based on the actual expenses incurred.
Any software purchased by enterprises or institutions, which meet the conditions to be identified as fixed assets or intangible assets, may be identified as fixed assets or intangible assets; and upon the verification and approval by the competent tax authorities, the depreciation or amortization period of such software may be shortened appropriately (cannot be shorter than two years).

Software enterprises that have been established in China after January 1, 2011 and have been recognized by the state according to relevant laws may enjoy the following tax preferential policies:

Valued-added tax payment refunds obtained by the qualified software enterprise in accordance to the “Notice on Value-Added Tax Policies for Software Products” may be deducted from the total income when calculating the taxable income.
The enterprise’s corporate income tax shall be exempt for the first and second year, and shall be levied at 25 percent for the third to fifth year; such preferential periods shall be calculated from the profit-making year till December 31, 2017.
Employee training expenses of the software enterprise shall be subject to separate accounting, and the actual amount incurred shall be deducted for the purpose of calculating taxable income.
Key software enterprises included in the national plan that have not enjoyed tax exemption preferences in the current year may pay corporate income tax at a reduced rate of 10 percent.
Any software purchased by enterprises which meet the conditions to be identified as fixed assets or intangible assets may be accounted as fixed assets or intangible assets, and their depreciation or amortization period may be shortened appropriately (cannot be shorter than two years).

The Announcement is retroactively effective from January 1, 2011.

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For further details or to contact the firm, please email china@dezshira.com, visit www.dezshira.com, or download the company brochure.

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