China issues more new tax policies to encourage technology innovation
December 16, 2015
On October 23，2015, China’s Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly published a circular (Cai Shui  No.116) on the “Expansion of Pilot Tax Policies in National Innovation Demonstration Zones to all of China” (“Circular 116). In this newsletter, FuJae Partners will outline the four pilot income tax policies that have rolled out across China, as detailed in Circular 116, and provide brief comments on these tax policies.
1. Policy on enterprise income tax on legal person partners in venture capital limited partnerships
From October 1, 2015, a legal person partner of a venture capital limited partnership who has invested in an unlisted small or medium high-tech enterprise for at least 2 years (24 months) is allowed to deduct, from its portion of taxable income it derived in the current year from its corresponding investment in the high-tech enterprise (through the limited partnership), amounts aggregating 70% of its share of the equity investment made in the high-tech enterprise by the limited partnership (the “Super Tax Deduction”). If this Super Tax Deduction exceeds such portion of its taxable income in a given year, the legal person partner may carry over the remaining amount of the Super Tax Deduction to the following year(s).
The legal person partner’s “share of equity investment in the high-tech enterprise” will calculated as follows:
Total amount of equity investment the venture capital limited partnership invested in the high-tech enterprise =Legal person partner’s capital contribution to the venture capital limited partnership / Total amounts of all partners’ equity contributions to the partnership as indicated in the partnership agreement
2. Policy on enterprise income tax in respect of income derived from technology transfers
As of October 1, 2015, the enterprise income tax exemption has been expanded to apply to (i) income derived by all resident enterprises in China from transfer of technology, and (ii) transfer of the non-exclusive license to use a technology with a five year or longer term. Specifically, for each eligible taxpayer, the first RMB5 Million of annual income derived from the technology transfer (the “Exempted Income”) will be exempted from enterprise income tax, and any amount in excess of the Exempted Income will be subject to enterprise income tax at half of the statutory tax rate.2. Policy on enterprise income tax in respect of income derived from technology transfers
In Circular 116, “technology” is defined to include patents (including national defense patents), computer software copyrights, exclusive rights to integrated circuit layout designs, rights to new plant varieties, new varieties of biopharmaceuticals and other technologies (determined by MOF and SAT).
3. Policy on individual income tax where an enterprise converts its reserves into share capital
From January 1, 2016, where an unlisted small or medium-sized high-tech enterprise converts its undistributed profits, surplus reserve or capital reserve to increase the capital contribution of an individual shareholder in the enterprise, such individual shareholder may structure an installment tax payment plan for settling the individual income tax liability resulting from the conversion over a period not exceeding 5 years. The individual shareholder shall be subject to individual income tax at a rate of 20% in respect of the deemed income under the taxable item of “income from interest, stock dividends and bonuses”.
4. Policy on individual income tax treatment of equity incentives
From January 1, 2016, technological personnel of high-tech enterprises, who are granted incentives in the form of their employer’s equity/shares, may structure an installment plan for the individual income tax payable in respect of the receipt of the equity, so as to pay tax due on such income over a period not exceeding 5 years. The individual income tax payable in respect of the equity incentives shall be calculated under the taxable item “wage and salary income” as specified in MOF’s and SAT’s joint Circular on Issues Concerning the Levy of Individual Income Tax on Income from Employee Stock Option Plans (Cai Shui  No.35). The taxable value of the equity incentive shall be determined by reference to the fair market value of the equity at the time it was granted.
These new policies highlight the emphasis that China’s policymakers are placing on technological innovation as a driving force in the Chinese economy, and showcase China’s determination to use National Innovation Demonstration Zones as pilot zones for potential nationwide reforms. If implemented effectively and cohesively, these new policies represent promising groundwork for the future of innovation-based tax policies with a focus on individual taxation.
FuJae Partners will continue to advise our clients on the tax implications of their business operations in China, and help them achieve tax efficiency by taking advantage of China’s tax incentive schemes.