Defining a High Tech Business in China

Posted on April 29, 2008
Filed Under Apparatchiks, China Business, China Law |

China’s State Administration of Taxation has released an important rule on the appraisal and classification of high-tech enterprises, which sets a new threshold for high-tech companies to enjoy China’s preferential taxes.

The new rule says that high-tech companies must be those that are engaged in at least one of the eight fields under the key support of the national government: electronic information technology; aviation and space technology; high-tech services; resource and environmental technology; biology and new medicine technology; new materials technology; new energy and energy-saving technology; and traditional industries that have undergone high-tech transformations and have their own core intellectual property rights. In addition, the income from high-tech product or service must account for more than 60% of the company’s total income.

Regarding human resources, the rule says that 30% of staff at high-tech companies must have a college diploma and technical staff whith technology-related diplomas must account for more than 10% of the company’s total staff. For R&D investment, the rule states that the companies must spend no less than 3%, 4% and 6%, respectively, of their annual sales income in the recent three years on research and development. Interestingly, Beijing has asked each high-tech enterprise to spend more than 5% of its annual sales income on R&D â€” this means even though some Beijing companies are not high-tech companies under the city’s appraisal criteria, they now can enjoy the preferential tax policy.

Companies appraised as high-tech companies will be issued a certificate. The certificate will be valid for three years. During the period, the company can enjoy a 15% preferential tax policy.

As laudable an effort as this may be, I’m not sure that putting the onus on the accounting and HR department’s sleight of hand is the best way to promote innovation.