New incentives for China’s software and semiconductor industries

Mainland China has been dedicated to industry upgrades in recent years, particularly its software and IC industries. In June 2000, the State Council announced its “Policies on Encouraging the Development of the Software and Integrated Circuit Industries” (No. Guo-Fa-[2000]18) to provide support to the overall industry development in terms of financing, tax concessions, personnel training, and intellectual property protection.

After ten years, the State Council realigned its policies based on the current industry status and its future goals to introduce new “Policies on Further Encouraging the Development of the Software and Integrated Circuit Industries” (No. Guo-Fa-[2011]4) in January 2011. This new set of policies was intended to further optimize China’s software and IC industry environment by addressing seven major aspects, namely taxation, investment/financing, R&D, import/export, talent, intellectual property, and market. Some of the major taxation policies pronounced in notice Guo-Fa-[2011]4 are summarized below:

Continuance of existing concessions

• For software developers who sell their proprietary software products, the amount of value-added taxes exceeding the 3% requirement is “refunded immediately in full”. This concession was originally made available under notice Guo-Fa-[2000]18 and was scheduled to expire in 2010, but the State Council had decided to allow it to continue.
• Income tax concessions remain available to certified IC producers. Producers of integrated circuits with less than 0.8 um (inclusive) in thickness are entitled to a “2-year full tax concession followed by a 3-year 50% tax concession” from the year the company starts making profits. Producers of integrated circuits under 0.25 um in thickness, or IC investments amounting to more than RMB 8 billion, are entitled to a 15% preferential corporate tax rate. IC producers with more than 15 years of history are entitled to a “5-year full tax concession followed by a 5-year 50% tax concession” from the year the company starts making profits.
• Certified new “IC designers” and “software companies” may still enjoy the “2-year full tax concession and a 3-year 50% tax concession” from the profit-making year.

To accommodate Notice Guo-Fa-[2011]4, the General Administration of Customs announced its “Policies on Customs’ Support to Software and IC Industries” (Customs Notice [2011]30) in May 2011, which provided the following concessions on tariffs:

• Equipment imported for use by certified software companies, along with any technologies, accessories, and spare parts under the purchase contract, are exempted from import tariffs except for items that are specified in state policies as non-exempted. Tariff exempt items are still subject to value-added tax on imported goods.
• For certified producers of integrated circuits under 0.25 um in thickness, IC investments amounting to more than RMB 8 billion, and certified producers of integrated circuits under 0.8 um (inclusive) in thickness, purchases of raw materials, consumables, clean room construction materials, supporting systems, and spare parts and components required for IC production may be exempted from import tariffs and value-added taxes. Applications for tax exemption can be submitted to the local customs administration.
• For certified IC designers and eligible software companies, imports that comply with the current laws, regulations, and state policies may enjoy the goods-in-bond scheme.

Please note that there are other tax concessions which China had made available for the software and IC industries in previous ordinances and notices. There are ordinances that specifically govern how the eligibility of software and IC companies is certified. It is a rather complex system, for which companies are strongly advised to consult experts when assessing the investment environment or structuring taxation strategies.

Mainland China has introduced a multitude of supporting policies for its software and IC industries, therefore creating a more flexible taxation environment that facilitates industry integration and specialization. Taiwanese enterprises can manage income tax and turnover tax more effectively, and improve operating efficiency if these policies are properly utilized to their advantage during the investment and transaction planning stages. Companies should review their current transaction patterns and investment plans in detail before seeking ways to optimize business operations.

(This article was completed with the assistance of PwC Taiwan Tax Manager – Tim Pao; the article was originally published in “PwC China Tax Alert”, 2011 Vol.6)