Tax Breaks Related to IPRs
Author: Wendy Wu, Youyou Shi
Intellectual property rights (IPRs) can not only contribute to a company’s performance and profiting in the market, but help the company obtain opportunities for tax breaks in accordance with the applicable taxation laws and policies. The primary tax breaks related to IPRs (mainly technological properties such as patents, software copyrights, integrated circuit designs, plant varieties, and know-how) in Mainland China are briefly listed below.
I. Reduction of income tax based on high-tech status
For a company certified as a high and new technology (“high-tech”) enterprise, the preferential income tax rate of 15% will apply, instead of the general rate of 25%. Among the prerequisites for a company to be certified as high-tech, those related to IPRs include the company shall own the IPRs which play technically core roles in its major products/services, the said IPRs belong to high-tech fields as expressly stipulated, and the ratio of income obtained from the high-tech products/services to the total income of the company in the latest year is no less than 60%.
Therefore, if a company intends to be certified as high-tech, it need own the IPRs that play technically core roles in its major products/services, and further, have made profit in certain proportion to its total income by exploiting the said IPRs. This actually focuses on both the IPRs themselves and the commercialization of the IPRs by the company. That is to say, the IPRs based on which a company can be certified as high-tech and thus obtain tax cuts need have been put into actual use by the said company.
II. Pre-tax additional deduction of research and development expenses
If expenses incurred in research and development activities (“R&D expenses”) are calculated in the profits and losses where no intangible asset has been formed, 50% of R&D expenses will be deducted from the company’s taxable income of the year in addition to the deduction of actual expenses; but if any intangible asset is obtained based on the R&D expenses, these expenses will be amortized at 150% of the cost of the afore-said intangible asset. Generally speaking, the R&D expenses include payment to staff, cost of materials and instruments, depreciation cost, design fees, test fees, consultancy fees, etc. In the case of cooperative development, the R&D expenses respectively sustained by each of the parties concerned will be separately calculated and deducted. This tax break policy, however, is also subject to the industry a company is engaged in. For example, those mainly engaged in wholesale and retail, accommodation, catering, or entertainment are not entitled to such tax reduction.
III. Exemption and deduction of value-added tax and income tax in technological transfer
Value-added tax shall be exempt where a company transfers technology (including transferring ownership or license of patented and other technologies) or provides technological consultancy or services related thereto. Moreover, the income not exceeding CNY 5 million obtained by a company from technological transfer (including transfer of ownership of technology and transfer of license to use the technology for no less than 5 years) within one taxable year shall be exempt from income tax, and the excess shall be taxed at a half of the general rate of 25%.
What need be emphasized is that to enjoy the foregoing tax cuts in technological transfer, a company will have to reach an agreement related thereto in writing and get it certified and registered at the department of science and technology or the department of commerce at or above the provincial level. Such agreement is indispensable in defining and clarifying each party’s rights and obligations. Besides, it will be required by the bank in accordance with the rules promulgated by the State Administration of Foreign Exchange, where the payment of consideration under the agreement involves foreign exchange and a remittance concerned is equivalent to no less than USD 50,000.