October Reminder: Apply for Super Deductions of R&D Expenses for Q1-3

China’s tax authority reminds taxpayers that they can apply for the super deduction of R&D expenses for the first three quarters of 2024 during the October filing period. We provide a Q&A section on when and how to apply for this policy.

The major tax filing period for October 2024 has arrived. Recently, the State Taxation Administration (STA) reminded taxpayers that they can apply for the super deduction of R&D expenses policy—the additional deduction of research and development (R&D) expenses for the first three quarters of 2024 during the October filing period.

The State Taxation Administration has provided detailed explanations regarding policy regulations, filing timelines, methods of claiming the deduction, and how to complete the filing.

What is the super deduction of R&D expenses?

When calculating the corporate income tax (CIT) taxable income, while the cost is usually 100 percent deductible, the expenses are subject to a deduction cap.

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For example, for business entertainment expenses relating to production and business operations, no more than 60 percent of the actual amount incurred can be deducted from taxable income and this amount cannot be more than 0.5 percent of the sales revenue of the current year.

Nevertheless, in an effort to encourage innovation, China sets no deduction cap for the expense actually incurred by an enterprise in R&D activities. Rather, an additional percentage of R&D expenses actually incurred can be deducted from the taxable income, on the basis of actual deduction. This is the so-called “super deduction of R&D expenses”.

The pre-tax super deduction of R&D expenses was first implemented in 2008 and has since continued to relax the scope of activity that is included in the policy and increased the ratio of the deduction for more types of companies.

According to current effective policies, for eligible enterprises, if the R&D expenses do not form intangible assets and are included in the current profits and losses, on the basis of actual deduction, an additional 100 percent of such R&D expenses could be deducted from the taxable income amount. This in effect means that companies can deduct a total of 200 percent of their R&D expenses before tax, resulting in lower CIT payable for a given tax year.

Meanwhile, where intangible assets are formed, R&D expenses that lead to the creation of intangible assets, which are also known as “capitalized R&D expenses”, can be amortized before tax at 200 percent of their cost. There is no time limit for when the intangible assets are formed, which means that the intangible assets can be created in one year and amortized before tax at 200 percent of the cost in the following year.

To be eligible for the super deduction, companies must meet both of these requirements at the same time:

1. Be a resident enterprise with sound accounting, audits, and collections, which is able to collect R&D expenses accurately; and
2. Must not be in one of the industries on the negative list, which include tobacco manufacturing, accommodation and catering, wholesale and retail, real estate, leasing and business services, and entertainment industries.

For more information about China’s R&D super deduction policy, please read:

• Pre-Tax Super Deduction of R&D Expenses in 2023 – An Explainer
• Qualifying for China’s Pre-Tax Super Deduction for R&D Expenses – A Case Study Review

When should you apply for the super deduction of R&D expenses?

Under current regulations, companies may apply for the R&D expense super deduction policy during the July and October filing periods, as well as during the annual CIT reconciliation (settlement).

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When prepaying CIT for the third quarter in October (for quarterly prepayments) or in September (for monthly prepayments), companies have the option to apply the super deduction policy for R&D expenses incurred in the first three quarters of the year. This decision should be based on their profit and loss situation, R&D expense accounting, and the total amount of R&D expenses.

If a company opts not to apply the super deduction policy during the October prepayment period, it retains the opportunity to do so during the annual corporate income tax settlement, which must be completed before the end of May of the following year.

How to apply for the R&D super deductions in October?

To benefit from the R&D expense super deduction policy, taxpayers can self-assess if they are qualified to access the incentives and apply them when making the tax payment (that is, the time of prepayment or final settlement) – without seeking approval from the local tax bureau. Companies must calculate the super deduction amount by themselves based on the actual R&D expenses incurred.

Taxpayers should fill in the name of the preferential item and the corresponding amount in line 7, “Less: Tax-exempt income, reduced income, and additional deductions,” of the “CIT Monthly (Quarterly) Prepayment Return (Class A) Form of the People’s Republic of China.”

However, this does not mean taxpayers can enjoy tax incentives at will. Companies should complete the “R&D Expense Super Deduction Details Form (A107012)” based on the R&D expenses eligible for the super deduction (incurred in the first half of the first three quarters of the year). This form, along with other relevant supporting documents, should be retained for future reference.

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