New Recognition Procedures for High-tech Enterprises

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By Ronin Lin

June 11 – On April 14, 2008, the Ministry of Science and Technology, the Ministry of Finance together with the State Administration of Taxation promulgated the Administrative Measures for Recognition of High – New Technology Enterprises (Circular 172) governing the recognition of high-tech companies.

Article 4 of the circular states that recognized high-tech companies under this circular is qualified to enjoy the preferential 15 percent corporate income tax rate. However, we note that the restrictions have been set with limited scope that few enterprises, whether domestic or foreign company, have any hope of qualifying for. The door for any enterprise wanting to get corporate income tax incentives though purchasing technique for third parties or bringing in outdated technologies has been closed.

The circular defines high-tech companies as resident enterprises registered in mainland China for more than one year and that continually concentrate on researching and developing their own core intellectual property rights in order to carry out business within the scope of “State-encouraged High-New Technology Areas.” Furthermore, six requirements need to be fulfilled by a company in order to be qualified as a high-tech or new technology enterprise:

1. The enterprise is established within Mainland China (Hong Kong, Macau and Taiwan are excluded) and shall hold intellectual property of the core technology of its main product (service) through self-development, transfer, donation, merger and acquisition, etc., or by an exclusive license with a term of more than five years within the last three years.

2. The product (service) of the enterprise shall under the scope of “State-encouraged High-New Technology Areas.”

3. The research and development staffs with college diploma or above should exceed 30 percent of the total employee. At the same time, the research and development staff should also occupy more than 10 percent of the total workforce.

4. The enterprise should continually concentrate on research and development of new technology and the R&D expenses in continually three accounting years should meet the following requirement:

  • For an enterprise with sales revenue less than RMB50 million in the most recent year, the R&D expenses shall not be less than 6 percent of the total sales
  • For an enterprise with sales revenue less than RMB200 million in the most recent year, the R&D expenses shall not be less than 4 percent of the total sales
  • For an enterprise with sales revenue more than RMB200 million in the most recent year, the R&D expenses shall not be less than 3 percent of the total sales
  • In addition, at least 60 percent of the R&D expenses should be conducted within Mainland China. For enterprises registered less than three years, the ratio is calculated based on the actual operating period

5. The total sales revenue generated from the high-new technology-related products (or services) shall exceed 60 percent of the total annual revenue for the current year.

6. The management performance on R&D activities, the ability to transform technological achievements into products, the number of intellectual properties held, the growth of the sales and total assets should be evaluated under the instruction of “Guidelines for the Administration of Recognition for High-New Technology Enterprises” (to be separately drafted).