New Policy on R&D Cost Pre-tax Deductions

On March 26th, the Ministry of Finance of the People's Republic of China issued a notice on further improving the pre-tax deduction policy for research and development expenses.

The announcement stated that for enterprises conducting research and development activities, if the actual R&D expenses incurred have not been included in the current profit and loss statement because no intangible assets have been formed, they will be allowed to deduct the actual incurred expenses based on regulations and additionally deduct 100% of the amount before tax starting from January 1, 2023. For those that have formed intangible assets, they will be allowed to amortize them before tax at 200% of the intangible asset cost starting from January 1, 2023.

Below is the full text of the announcement.

Announcement on Further Improving the Pre-Tax Deduction Policy for Research and Development Expenses

Announcement No.7 of the Ministry of Finance and the State Taxation Administration for the Year 2023.

To further encourage companies to increase their research and development investment and better support technological innovation, we are announcing the policy regarding pre-tax deduction for enterprise research and development expenses.

Companies that incur research and development (R&D) expenses during R&D activities, but do not generate intangible assets that can be included in current gains or losses, will receive an additional 100% deduction from taxable income starting January 1, 2023, on top of the actual deductible expenses reported according to regulations. For those that do generate intangible assets, starting January 1, 2023, the intangible assets cost will be amortized before tax at 200%.

Secondly, companies that are eligible for the R&D expense additional deduction policy must adhere to other policy guidelines and management requirements as detailed in the "Circular of the Ministry of Finance, State Administration of Taxation, and Ministry of Science and Technology on Improving the Pre-tax Additional Deduction Policy for Research and Development Expenses" (CaiShui [2015] No. 119) and the "Circular of the Ministry of Finance, State Administration of Taxation, and Ministry of Science and Technology on Issues Related to the Pre-tax Additional Deduction Policy for Overseas R&D Expenses Commissioned by Enterprises" (CaiShui [2018] No. 64) and other relevant documents.

The announcement will take effect on January 1st, 2023. It repeals three other announcements, including the "Announcement of the Ministry of Finance and State Administration of Taxation on Further Improving the Policy of Pre-tax Deduction for Research and Development Expenses" (No. 13 of 2021), the "Announcement of the Ministry of Finance, State Administration of Taxation and Ministry of Science and Technology on Further Increasing the Pre-tax Deduction Rate for Research and Development Expenses of Technology-based Small and Medium-sized Enterprises" (No. 16 of 2022), and the "Announcement of the Ministry of Finance, State Administration of Taxation and Ministry of Science and Technology on Strengthening the Deduction of Tax Prepaid Support for Technological Innovation" (No. 28 of 2022).

This is to hereby announce.

The Ministry of Finance and the State Administration of Taxation.

March 26th, 2023.

Reference:

Announcement on further improving the pre-tax additional deduction policy for research and development expenses.