Laws of the People's Republic of China

The State Administration of Taxation

Supplementary Circular of the State Administration of Taxation on the Technology Development Expenses of Enterprises with Foreign Investment to be Deducted from the Taxable Income

GuoShuiHan [2001] No.405

June 8, 2001

The State Administration of Taxation of the various provinces, autonomous regions, municipalities directly under the center government and municipalities separately listed on the State plan, the Administration of Local Taxation of ShenZhen city:

The relevant issues on how additional calculations and deductions of the expenses addressed in the "Circular of the State Administration of Taxation on Relevant Issues Concerning the Technology Development Expenses of Enterprises with Foreign Investment to be Deducted from the Taxable Income" (GuoShuiFa [1999] No. 173, hereinafter referred to as the "Circular") shall be applied to the expenses arisen from the technology development which enterprises with foreign investment carried out themselves or by entrusting others, as well as from the technology development services they provide upon entrustment, are hereby further clarified as follows:

I.

Where an enterprise with foreign investment applies, in accordance with the Circular, for the deduction of its taxable income for an additional 50% of its incurred technological development expenses, it shall devise in advance a plan for the technological project development and a budget for the technology development expenses, as well as establish a special office or appoint professionals responsible for the implementation of the said plan and budget. It should also be able to accurately collect and check the actual amount of technology development expenses.

II.

Where an enterprise with foreign investment, in the process of technology development, cooperates with another organization such as an enterprise, an organ, a government-sponsored institution, or a scientific research institution, etc. (hereinafter referred to as "another entity") or entrusts another entity to develop a new product, a new technology or a new process for the purpose of solely or jointly possessing the results of technology development, it may, in accordance with the Circular, enjoy preferential treatment for the deduction of taxable income for an additional 50% of all incurred technology development expenses (including expenses paid to an entrusted party) as provided by Article 1 and Article 2 of the Circular.

III.

For an enterprise entrusted to provide technology development services, if all expenditures incurred from providing the entrusting party with technology development services do not fall within the scope of its technological development expenses, but belong to "the operational costs and expenses of the business of technology development services for an enterprise engaged in such business" provided in Article 1 and Article 2 of the Circular, and belong to the fees charged by the enterprise entrusted to provide technology development services; the entrusting party shall determine in accordance with the Circular and Article 2 of this Supplementary Circular whether the fees it charged when entrusted to provide technology development services shall be regarded as technology development expenses, for which the enterprise may enjoy the preferential treatment of a taxable income deduction by an additional 50%. Therefore, the entrusted enterprise may enjoy the preferential treatment of a taxable income deduction by an additional 50% of the expenditures incurred in its business of providing technology development services.