China raises R&D ‘super deduction’ for manufacturing

China’s State Council announced on 24 March that the ‘super deduction’ of research and development (R&D) expenses for manufacturing enterprises will be further raised from 175% to 200% in order to encourage innovation. It is also extended for three years to 31 December 2023.

As a result, the Ministry of Finance (MOF) and State Taxation Administration (STA) jointly released Public Notice No. 13 (PN 13) on 31 March 2021.

As of 1 January 2021, manufacturing enterprises are permitted to claim a 200% super deduction on eligible R&D expenses actually incurred in the course of R&D activities for Corporate Income Tax (CIT) purposes. Alternatively, if R&D expenses incurred are capitalised as intangible assets, such enterprises are allowed to amortise the intangible assets based on 200% of the actual costs incurred.

PN 13 specifies that the manufacturing enterprises should derive over 50% of annual operating income from manufacturing industries, as set out in the prevailing Industrial classification for national economic activities.

Eligible enterprises can claim the super deduction of R&D expenses incurred in the first half of a year under the provisional CIT filing for the third quarter. They are required to self-assess before applying the tax preference and maintain the relevant supporting documents for future references. Alternatively, they can choose to claim the total amount of R&D expenses in the annual CIT filing to be completed by the end of May the following year.

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