Super Deduction of Research and Development Expenses – Guidelines 2.0

published on 22 January 2024 | reading time approx. 3 minutes

As a long-term research and development (“R&D”) activity encouraging policy, since January 2023, all companies of industries not included in the stipulated negative list may enjoy 100 percent super deduction for their eligible R&D expenditures in calculating the taxation bases of Chinese corporate income tax (“CIT”).

In view of the complexity of the relevant tax circulars regarding the implementation of the tax preferential treatment, documentation requirement, declaration formalities, the Chinese tax authority published the version 2.0 of the policy implementation guidelines for R&D expenditures super deduction (“Guidelines 2.0”) in July 2023.

The Guidelines 2.0 re-organized the details in the prevailing tax circulars in modules including:

Policy interpretation
R&D activity definition
R&D project management requirements
R&D expenditure accounting requirements
Declaration and follow-up administration requirements.

The following points are particularly important for taxable persons carrying out R&D activities:

R&D Activity Definition

The Guidelines 2.0 included a special section to enumerate the boundaries of R&D activities and other activities with many examples, as well as the conditions to be met if certain activities are defined as R&D activities. Some typical examples are set out below:

Conditions for pilot plant test project to be categorized as R&D activity
Conditions for industrial designing to be categorized as R&D activity
After-sales service are generally not considered as R&D activity
Data collecting are not considered as R&D activity unless necessary for R&D project
Circumstances under which technological activities can be categorized as R&D activity
Typical cases for software related development activities which can be and cannot be considered as R&D activity

Management for R&D Projects

It is suggested in the Guidelines 2.0 that companies should establish following management procedures for the whole process of R&D project from project setup, implementation to project conclusion, in order to facilitate the application of the policy and the follow-up administration by the tax authority:

For project setup, corporate resolution and project plan should be prepared. Project plan shall define why to do, what to do, conditions to do, result and level to be achieved and the creative points for the project.
For project implementation, companies are suggested to centralize project management by specified departments, nominate one or two in-charge persons who shall take the responsibility of the project, set up procedure to record the resource input under the project during the whole process, set up procedures for progress recording and project adjustment, etc.
For project conclusion, a report should cover the points including project progress, results achieved (e.g. intellectual property) breakthrough point in critical techniques, failure reason analysis, etc.
The whole process should be sufficiently documented.

Accounting Requirements for R&D Expenditures for Super Deduction

Accounting treatment of R&D expenditures shall follow Chinese GAAP.

Subsidiary account and ledger shall be set up for each R&D project following the template provided the tax authority or self-designed template applying the same logic between data. Expensed expenditures and capitalized expenditures should be recorded in separate subsidiary accounts. Summary sheet of R&D expenditure shall include the expensed expenditure of the current period and the capitalized projects that are concluded before the current period.

R&D expenditures have to be accounted separately from other production and operation expenses.

Formalities for Enjoying R&D Expenditure Super Deduction

The Guidelines 2.0 indicated the following processes of formalities for enjoying R&D expenditures extra-deduction.

Our Observation

The Guidelines are proved to be user-friendly which helps companies make reliable self-assessment upon their own applicability of the preferential policy, and implement effective management procedures when carrying out their R&D activities. While it should be noted that the Guidelines do not take effect as tax circular, for issued not covered by it, tax circulars needs to be further referred and interpreted, so as to ensure the policy can be applied sufficiently and correctly.

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