What’s new: China has raised the requirements for tech companies to qualify for a tax break, in a move that aims to foster true innovation so China can become a global tech powerhouse.
Since last year under the policy (link in Chinese), qualified domestic software companies and integrated circuit design firms have been able to get exemptions from corporate income tax for the first five years after they turn a profit. After that they only need to pay a 10% rate, well below the standard rate of 25%.
To qualify for the preferential tax policy under the new requirements (link in Chinese) issued earlier this year, software firms have to spend at least 7% of their annual revenue on research and development (R&D), up from 6% under the previous rules (link in Chinese). The new rules also set other higher requirements.
The new requirements emphasize that eligible software firms should have the R&D capability to register intellectual property rights, said Martin Ngai, a partner at Ernst & Young Greater China.
This year, authorities also removed the mobile internet industry (link in Chinese), which includes browser, navigation and mobile payment companies, from the sectors covered by the tax break.
The impact: The policy change has impacted internet giants such as Alibaba Group Holding Ltd. Last week, the e-commerce behemoth said that the government had stopped treating some of its businesses, like software companies, qualifying for the tax break, Bloomberg News reported.
Related: Alibaba Warns of Higher Taxes as China Crackdown Widens
Contact reporter Tang Ziyi (ziyitang@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)
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