The China tax incentives for Advanced Technology Service Enterprises (ATSE) were first introduced in the Suzhou Industrial Park in 2006, then applied to 21 pilot cities in 2014, and subsequently expanded to another 11 cities in 2016. This has been a major tax incentive regime available for service-oriented enterprises, especially enterprises engaged in providing technology related services to clients and affiliates outside China.
In August 2017, China’s premier Li Keqiang announced a new plan during the State Council’s executive meeting: China will roll out a series of policies/incentives to further boost foreign investments, including a nationwide application of the ATSE tax incentives.
As a follow-up implementation rule to the high-level plan announced by Premier Li Keqing, on 2 November 2017 the Ministry of Finance, the State Administration of Taxation, the Ministry of Commerce, the Ministry of Science and Technology and the National Development and Reform Committee jointly issued a circular (Circular 79) formally setting out the detailed guidance and regulation on the rollout of the ATSE tax incentives.
Circular 79 clarifies that, with retrospective effect from January 1, 2017, the following ATSE tax incentives will be rolled out nationwide:
- Corporate income tax for a qualified ATSE will be calculated at the preferential tax rate of 15 percent and
- Employee education expenditure incurred by a qualified ATSE, up to 8 percent of its total salaries and wages, may be deducted for corporate income tax purpose; while the portion exceeding 8 percent may be carried forward for corporate income tax deduction in future years.
An enterprise will need to fulfil all the following conditions in order to qualify as an ATSE:
- The enterprise is registered in mainland China (not including Hong Kong, Macau or Taiwan)
- The enterprise is engaged in one or more technologically advanced services as specified in the “Recognition Scope of Technologically Advanced Services (for Trial Implementation),” and adopts advanced technology during the course of its business or has relatively strong research and development capacity
- Employees with a college diploma or above account for more than 50 percent of the total employees of the enterprise
- Income from the technologically advanced services specified in the “Recognition Scope of Technologically Advanced Services (for Trial Implementation)” accounts for more than 50 percent of the total income of the enterprise in the current year and
- Income from offshore service outsourcing business is not less than 35 percent of the total income of the enterprise in the current year. Income from the offshore service outsourcing business refers to the income that an enterprise obtains from an overseas entity based on the contract service agreement with the overseas entity for the provision of information technology outsourcing (ITO), business process outsourcing (BPO) or knowledge process outsourcing (KPO) specified in the “Recognition Scope of Technologically Advanced Services (for Trial Implementation)” by the enterprise or its direct subcontractor to the overseas entity.
It is expected that the Science and Technology Bureaus at provincial level will formulate specific administrative measures according to Circular 79 in conjunction with the provincial Bureau of Commerce, provincial Bureau of Finance, provincial Tax Bureau, and provincial Development and Reform Committee, and will be overall responsible for the approval and monitoring of ATSEs in the province.
Circular 79 requires enterprises qualifying for ATSE to file an application with the provincial Science and Technology Bureau where such enterprise is located. Subject to the joint review by the provincial Science and Technology Bureau and provincial Bureau of Commerce, provincial Bureau of Finance, provincial Tax Bureau, and provincial Development and Reform Committee, a list of enterprises qualifying for ATSE will be issued by the bureaus and uploaded at the “National Technologically Advanced Service Enterprises Business Application and Monitoring Platform” of the Ministry of Science and Technology for record filing. Circular 79 also requires enterprises qualifying for ATSE to complete and submit the required information and data in the “Service Trade Statistics Monitoring Management Information System” of the Ministry of Commerce.
Enterprises that are granted ATSE qualification will be able to enjoy a preferential corporate income tax rate of 15 percent and enhanced deduction on employee education expenditure. When there are changes causing an enterprise no longer qualifying for ATSE, the ATSE should report the changes in its qualification to the competent tax authority within 15 days from the day on which such change takes place and cease to enjoy the preferential tax treatment.
The issuance of Circular 79 clearly indicates China’s encouragement and promotion of investment in the high technology and high value-add service sectors, which are in line with the country’s strategic development plan. The nationwide application of ATSE will allow more existing foreign invested enterprises to enjoy this tax incentive, especially for those not located in the previous pilot cities. ATSEs have more lenient requirements as compared to the High and New Technology Enterprise (HNTE) qualification but essentially enjoy the same preferential corporate income tax rate as HNTEs, making them more suitable and beneficial for enterprises that do not have sufficient research and development (R&D) expenses or ownership of intellectual properties, as required under the HNTE qualification.
Given this new opportunity to improve tax efficiency in China, multinational company groups may want to conduct a self-assessment on their China service subsidiaries and prepare to apply for the ATSE qualification. Foreign investors can also consider setting up contract technical service providers in China to provide outbound technical service to overseas affiliates, in view of enjoying the ATSE benefit.