China VAT : Understanding the Eligibility for VAT Incentives in R&D Centers

China VAT : Understanding the Eligibility for VAT Incentives in R&D Centers
China has provided clarification on certain Value Added Tax (VAT) incentives for purchase of equipment by foreign-
funded Research and Development (R&D) centers. In a recent circular, authorities provided additional guidance on
the eligibility requirements and criteria for claiming the tax exemption.
China VAT R&D: Highlights from Circular (93)
Clarification of certain criteria for import VAT exemption for foreign-funded R&D centers (Circular 115)
Circular (93) clarifies that the relevant commerce authorities must approve the establishment of foreign-
funded Research and Development centers.
Circular (93) specifies that the annual R&D expenditure (as stated in Circular 115) refers to the average
annual R&D expenditure of the last two years.
Circular (93) provides the definition of full-time R&D personnel (as stated in Circular 115).
Circular (93) clarifies that equipment orders already made and where the delivery is by the end of 2010
can be regarded as qualifying equipment.
Verification of eligibility requirements
Circular (93) clarifies that relevant commerce authority will review and inspect the application of the foreign-
funded Research and Development center. It also specifies that status of the approved foreign-funded Research
and Development centers will be revisited every two years. For centers that are disqualified, the VAT exemption
and VAT refund will be revoked.
Supervision of tax exempted/refunded equipment
Circular (93) clarifies that there is emphasis on the supervision of the tax exempted or refunded equipment. A
foreign-funded Research and Development center could incur a penalty for transfer, sale, disposal or use of the
equipment for another purpose without approval.
China VAT R&D: The Background
Earlier, authorities allowed general VAT taxpayers to deduct input VAT incurred on purchases of fixed assets from
their output VAT. Exemption from import VAT on equipment for R&D centers was also abolished, adversely
affecting the R&D centers as they are not general VAT taxpayers and cannot credit input VAT incurred on
purchased equipment against the output VAT. Later authorities moved to resolve this issue and the Ministry of
Finance (MOF), General Administration of Customs (GAC) and State Administration of Taxation (SAT) jointly issued
a circular (Circular 115) stating import VAT Tax exemption is available on equipment imported by R&D centers and
a full VAT refund is available on domestically-manufactured equipment purchased by the centers.
VAT Exemption on Imported Equipment
The import VAT exemption to foreign-funded Research and Development centers includes independent legal
entities, R&D departments or R&D branches of foreign-invested companies provided certain conditions are met.

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