High New Technology Enterprise Watch Out - Random Inspections are Just Around the Corner!

On 15 September 2021, the Torch High Technology Industry Development Center under the Ministry of Science and Technology (MOST) issued the circular Guo Ke Huo Zi [2021] No. 133, determined to carry out a nationwide inspection of the administration of high and new-tech enterprises (HNTE) recognition. The Circular requires the 36 HNTE accreditation institutions across the country to complete the self-inspection activities on the accreditation, supervision as well as utilization of tax incentives of the HNTEs locates within their regions by 25 October 2021.

The self-inspection requires verification of those accredited HTNEs, with specific requirements as follows:

• For regions with more than 10,000 existing HNTEs, the number of materials to be sampled and compared should be no less than 20 percent of the number of those HNTEs with valid accreditation.
• For regions where the existing HNTEs do not exceed 10,000, the number of materials to be sampled and compared should be no less than 30 percent of the number of those HNTEs with valid accreditation.

In addition, based on the result of materials sampling, on-site inspection shall also be conducted for certain enterprises.

Our Observations

The Chinese government has always vigorously promoted enterprises in China to enhance their R&D activities and has accordingly granted many tax incentives, including the additional pre-tax deduction of R&D expenses and the preferential corporate income tax rate of 15 percent for HNTEs. However, it should be reminded that the basis for benefiting from such incentives is that the enterprises must genuinely carry out the relevant R&D activities and meet the application requirements for HNTE accreditation (e.g., the ratio of R&D expenses to sales revenue, the ratio of revenue from high-tech products to total revenue, the ratio of R&D personnel to total employees, etc.). In addition, another condition for enjoying such tax incentives for HNTEs is that the above requirements need to be met throughout the validity period of the accreditation. Otherwise, the enterprise will not only be revoked of the HNTE title, have to repay all tax benefits claimed and pay a late payment fee, but will also be subject to the corresponding administrative penalties.

We recommend that the relevant enterprises review the latest application documents for HNTE as soon as possible, including the breakdown of R&D expenses, the list of R&D personnel and the breakdown and reasonableness of the revenue from high-tech products during the validity period. If the breakdown of R&D expenses includes R&D assistance from related parties, we also recommend that the enterprises communicate with their overseas related parties as soon as possible and prepare a specific description and breakdown of such R&D assistance to prepare for possible random checks.