Global Tax Alert | 14 October 2013

China issues circular on qualified research and development expenses eligible for super deduction

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Executive summary

Pursuant to China's corporate income tax (CIT) law and related implementation rules, companies can deduct an additional 50% of qualified research and development (R&D) expenses actually incurred for the development of new technology, new products and new skills (Super Deduction). China's State Administration of Taxation (SAT) issued Guoshuifa [2008] No. 116 (Circular 116) outlining the scope of R&D expenses eligible for Super Deduction, which, in practice, resulted in excluding some R&D related expenses that were not explicitly outlined in Circular 116 as qualified R&D expenses for Super Deduction purposes.

On 29 September 2013, China's Ministry of Finance and the SAT released Caishui [2013] 70 (Circular 70), providing additions and clarifications to the original categories of R&D expenses outlined in Circular 116. Circular 70 is effective retroactively for R&D expenses incurred on or after 1 January 2013.

Super Deduction expenses

Circular 116 qualified R&D expenses for Super Deduction purposes include the following items:

  • Design fees for new products, expenses for formulating procedures relating to new skills, and expenditures for technical books and information and translation fees directly related to R&D activities;
  • Materials, fuel and power consumed directly for R&D activities;
  • Salaries, wages, bonuses and allowances of employees directly engaged in R&D activities;
  • Depreciation expenses or rentals for apparatus and equipment exclusively used for R&D activities;
  • Amortization expenses of intangible assets such as software, patent rights, non-patented technologies exclusively used for R&D activities;
  • Development and manufacturing costs of equipment and molds used exclusively for intermediate testing and experiments;
  • On-site testing expenditures for exploration technology; and
  • Expenditures for verification, assessment and inspection of R&D results.

Circular 70 adds clinical trial costs for new drugs to be qualified R&D expenses, a favorable change for pharmaceutical companies. Circular 70 clarifies that the following expenses incurred by a company for R&D activities qualify for Super Deduction:

  • Premium for basic social security related insurance and contribution to housing funds paid for employees directly engaged in R&D activities;
  • Costs of operational maintenance, adjustment, testing and repair of apparatus and equipment incurred exclusively for R&D activities;
  • Costs of samples, prototypes, and general testing solutions that do not constitute fixed assets; and
  • Certification cost for R&D results.

Circular 70 states that companies may engage a qualified accounting firm or tax firm to issue special purpose audit reports or verification reports to claim Super Deduction. While this has been used in practice,

Circular 70 officially endorses the use of these reports. Circular 70 stipulates that tax authorities may request an opinion letter issued by the Science and Technology Bureau to confirm validity of claimed R&D projects.


Super Deduction of R&D expenses is one of a few favorable tax adjustments that derive permanent tax savings in China. Multinational companies are encouraged to discuss with their Chinese subsidiaries of a thorough review of R&D activities and their recordkeeping system to determine available and appropriate tax benefits.

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
  • Clement Yuen
    +852 2629 3355
Ernst & Young Tax Services Limited, China
  • Walter Tong, Shanghai
    +86 21 2228 6888
  • Henry Chan, Beijing
    +86 10 5815 3397
  • Andrew Choy, Beijing
    +86 10 5815 3230
  • Vickie Tan, Shanghai
    +86 21 2228 2648
Ernst & Young LLP, China (Mainland) Tax Desk, New York
  • David Kuo, New York
    +1 212 773 3660
  • Min Fei, New York
    +1 212 773 5622
  • Vickie Lin, New York
    +1 212 773 6001
  • Susan Qiu, New York
    +1 212 773 9382
  • Jessia Sun, New York
    +1 212 773 5955
  • Diana Wu, San Jose
    +1 408 947 6873
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris Finnerty
    +1 212 773 7479
  • Jeff Hongo
    +1 212 773 6143
  • Kaz Parsch
    +1 212 773 7201
  • Bee-KhunYap
    1 212 773 1816

EYG no. CM3874