Global Tax Alert | 20 August 2013
China clarifies implementation of preferential corporate income tax policies for software and integrated circuit industries
On 25 July 2013, China’s Ministry of Finance (MOF) and the State Administration of Taxation (SAT) released SAT Announcement  No. 43 (Announcement 43) to provide clarifications related to the implementation of preferential corporate income tax (CIT) policies for the software and IC sectors. Announcement 43 is retroactively effective from 1 January 2011.
Software enterprises applicable to preferential CIT policies
Software enterprises eligible for preferential CIT policies (qualifying software enterprises) are those that are recognized as software enterprises by authorized in-charge authorities, obtain software enterprises certification, and are taxed on an actual taxable income basis.
The total turnover of qualifying software enterprises includes1 revenue derived from the sale of goods, provision of services, transfers of property, dividends and other equity investment income, interest, rental, royalties, receipt of donation proceeds and other revenues.
First profit-making year
The first profit-making year of qualifying software enterprises is the year that follows the commencement of operations and generates positive taxable income, net of loss carry forwards. Positive taxable income under a deemed basis is also taken into account when determining the first profit-making year.
Continuity of tax holiday period
Once a tax holiday period starts, it continues until a fixed holiday period expires, regardless of whether there is an intervening loss year or for any other reason.
Calculation of research and development (R&D) expenses
Unless otherwise specified, R&D expenses are to be calculated consistent with the principles put forward under Guoshuifa  No. 116.
Transitional arrangements related to the recognition and administration of qualifying software enterprises
Type of enterprises
Qualifying software enterprises established and recognized on or after 1 January 2011
Enterprises established prior to 31 December 2010 and yet to be recognized as software enterprises
Announcement 43 also covers matters related to criteria of recognizing IC manufacturing/design enterprises and administration on respective preferential tax policies.
The following summarizes preferential CIT policies for the software and IC sectors.
IC design enterprises
IC manufacturing enterprises
Preferential CIT policies2
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Value-Added Tax (VAT) refunds received by qualifying software enterprises will be excluded from taxable income provided that VAT refunds are solely used for R&D of software products or expansion of production capacity, and are accounted for separately.
Purchased software that meets the criteria of fixed or intangible assets can be depreciated over two years or longer.
Announcement 43 clarifies the following:
- • Tax holidays for qualifying software enterprises are only applicable to those taxed on an actual basis but when determining the first profit-making year, either actual or deemed positive taxable income is acceptable.
- • The tax holiday period continues consecutively once started. In addition, qualifying software enterprises that commence their operations in the middle of a year are allowed to choose their first profit-making year according to a reasonable principle, but further clarification on implementation is not provided in either Announcement 43 or other prevailing circulars.
1. The term “total turnover amount” is defined in Article 6 of the CIT Law.
2. If a taxpayer is qualified for both IC manufacturing/design enterprise and software enterprise status, the taxpayer must elect either of the two statuses.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Services Limited, Hong Kong
- • Jane Hui
+852 2629 3836
- • Becky Lai
+852 2629 3188
Ernst & Young LLP, China Tax Desk, New York
- • David Kuo
+1 212 773 3660
- • Vickie Lin
+1 212 773 6001
- • Susan Qiu
+1 212 773 9382
- • Jessia Sun
+1 212 773 5955
Ernst & Young LLP, China Tax Desk, San Jose
- • Diana Wu
+1 408 947 6873
Ernst & Young LLP, Asia Pacific Business Group
- • Chris Finnerty
+1 212 773 7479
- • Jeff Hongo
+1 212 773 6143
- • Kaz Parsch
+1 212 773 7201
- • Bee-Khun Yap
+1 212 773 1816
EYG no. CM3744