Notice on Further Encouraging the Development of the Software Industry and the Integrated Circuit Industry through Corporate Income Tax Policies

　　Cai Shui [2012] No. 27

　　Finance Departments (Bureaus), State Taxation Administrations, and Local Taxation Administrations of all provinces, autonomous regions, municipalities directly under the central government, and cities separately listed in the national plan:

　　In accordance with the Enterprise Income Tax Law of the People’s Republic of China, its Implementation Regulations, and the Notice of the State Council on Issuing Several Policies to Further Encourage the Development of the Software Industry and the Integrated Circuit Industry (Guofa [2011] No. 4), and in order to further promote scientific and technological innovation, upgrade industrial structures, and foster the development of the information technology industry, we hereby announce the following corporate income tax policies aimed at encouraging the development of the software industry and the integrated circuit industry:

　　1. Integrated circuit manufacturing enterprises whose integrated circuits have a line width of 0.8 microns or less (inclusive), upon certification, shall calculate their preferential period starting from the year in which they first become profitable, before December 31, 2017. From the first to the second year, they shall be exempt from corporate income tax; from the third to the fifth year, they shall pay corporate income tax at half the statutory rate of 25%, and this preferential treatment shall continue until the end of the period.

　　II. Integrated circuit manufacturing enterprises with a line width of less than 0.25 microns or with an investment exceeding 8 billion yuan, upon certification, shall be subject to the enterprise income tax at a reduced rate of 15%. For enterprises with an operating period of more than 15 years, the preferential treatment period shall be calculated from the year in which they first become profitable, prior to December 31, 2017. Specifically, from the first to the fifth year, the enterprise income tax will be exempted; from the sixth to the tenth year, the enterprise income tax will be levied at half the statutory rate of 25%, and this preferential treatment will continue until the end of the specified period.

　　3. Newly established integrated circuit design enterprises and qualified software enterprises within China, upon certification, shall calculate their preferential period starting from the year in which they first become profitable, provided that such period does not exceed December 31, 2017. Specifically, they will be exempt from corporate income tax for the first and second years; for the third through fifth years, corporate income tax will be levied at half the statutory rate of 25%, and this preferential treatment will continue until the end of the specified period.

　　4. Key software enterprises and integrated circuit design enterprises included in the national planning and layout, if they did not enjoy tax exemptions in the current year, may have their corporate income tax levied at a reduced rate of 10%.

　　V. Value-added tax refunds immediately collected and refunded as stipulated in the “Notice of the Ministry of Finance and the State Administration of Taxation on the Value-Added Tax Policy for Software Products” (Cai Shui [2011] No. 100) received by software enterprises meeting the relevant conditions shall be used exclusively by the enterprises for software product research and development and for expanding reproduction, and shall be accounted for separately. Such refunds may be treated as non-taxable income and deducted from the total revenue when calculating taxable income.

　　6. The training expenses for employees of integrated circuit design enterprises and qualified software enterprises shall be accounted for separately and deducted from the taxable income based on the actual amount incurred.

　　7. Software purchased by enterprises that meets the criteria for recognition as fixed assets or intangible assets may be accounted for as either fixed assets or intangible assets. The depreciation or amortization period for such software may be appropriately shortened, with a minimum duration of 2 years (inclusive).

　　8. For production equipment used by integrated circuit manufacturing enterprises, the depreciation period may be appropriately shortened, with a minimum of 3 years (inclusive).

　　9. The integrated circuit manufacturing enterprises referred to in this notice are those whose primary business is the manufacture of monolithic integrated circuits, multi-chip integrated circuits, and hybrid integrated circuits, and which simultaneously meet the following conditions:

　　(1) A legal entity established within the territory of China in accordance with the law and certified as having qualification as an integrated circuit manufacturing enterprise;

　　(2) The proportion of employees who have signed labor contracts and hold an associate degree or higher shall account for no less than 40% of the enterprise’s average monthly total number of employees for the year; among them, the proportion of research and development personnel shall account for no less than 20% of the enterprise’s average monthly total number of employees for the year.

　　(3) Possess core, critical technologies and conduct business operations based on these technologies, with the total amount of research and development expenses for the current year accounting for no less than 5% of the enterprise’s total sales (operating) revenue (the sum of revenue from principal operations and revenue from other operations; the same applies hereinafter). Among these, the amount of research and development expenses incurred within China shall account for no less than 60% of the total research and development expenses.

　　(4) The proportion of integrated circuit manufacturing and sales (operating) revenue to the enterprise’s total revenue shall not be less than 60%.

　　(5) Possess the means and capabilities to ensure product production, and have obtained relevant qualification certifications (including ISO quality system certification, human resource capability certification, etc.);

　　(6) Possess the basic conditions necessary for integrated circuit production, including suitable business premises and hardware and software facilities.

　　The “Administrative Measures for the Recognition of Integrated Circuit Manufacturing Enterprises” shall be formulated separately by the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Finance, the State Administration of Taxation, in conjunction with relevant departments.

　　10. For the purposes of this notice, “integrated circuit design enterprises” or “software enterprises meeting the relevant criteria” refer to enterprises whose primary business is integrated circuit design or software product development and that simultaneously meet the following conditions:

　　(1) Legal entities established within China after January 1, 2011, and duly recognized as having qualification as integrated circuit design enterprises or software enterprises;

　　(2) The proportion of employees who have signed labor contracts and hold an associate degree or higher shall account for no less than 40% of the enterprise’s average monthly total number of employees for the year; among them, the proportion of research and development personnel shall account for no less than 20% of the enterprise’s average monthly total number of employees for the year.

　　(3) Possess core, critical technologies and conduct business operations based on these technologies, with the total amount of research and development expenses for the current year accounting for no less than 6% of the enterprise’s total sales (operating) revenue. Among these, the amount of research and development expenses incurred within China must account for no less than 60% of the total research and development expenses.

　　(4) For integrated circuit design enterprises, the proportion of integrated circuit design sales (operating) revenue in the enterprise’s total revenue shall be no less than 60%, of which the proportion of independently designed and sold (operating) integrated circuit revenue in the enterprise’s total revenue shall be no less than 50%. For software enterprises, the proportion of software product development and sales (operating) revenue in the enterprise’s total revenue shall generally be no less than 50% (with the proportion of embedded software product and information system integration product development and sales (operating) revenue in the enterprise’s total revenue being no less than 40%). Among these, the proportion of independently developed and sold (operating) software product revenue in the enterprise’s total revenue shall generally be no less than 40% (with the proportion of embedded software product and information system integration product development and sales (operating) revenue in the enterprise’s total revenue being no less than 30%).

　　(5) The core business possesses independent intellectual property rights, including software products that are backed by testing certificates issued by software testing institutions recognized by the provincial-level software industry authorities and by the “Software Product Registration Certificate” issued by the software industry authorities.

　　(6) Possess the means and capabilities to ensure the quality of designed products, establish a quality management system that meets the requirements of integrated circuits or software engineering, and provide documented records of processes demonstrating effective operation.

　　(7) Possess a development environment—including production and business premises, software and hardware facilities, and other resources—suitable for integrated circuit design or software development (such as EDA tools and legitimate development tools), as well as a technical support environment relevant to the services provided.

　　The “Administrative Measures for the Recognition of Integrated Circuit Design Enterprises” and the “Administrative Measures for the Recognition of Software Enterprises” shall be formulated separately by the Ministry of Industry and Information Technology, the National Development and Reform Commission, the Ministry of Finance, the State Administration of Taxation, in conjunction with relevant departments.

　　11. Key software enterprises and integrated circuit design enterprises included in the national planning and layout, in addition to meeting the conditions stipulated in Article 10 of this Notice, will be subject to comprehensive evaluation by the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Finance, the State Administration of Taxation, and other relevant departments. This evaluation will take into account the enterprises’ annual sales (operating) revenue from integrated circuit design or software product development and sales (operating), as well as their profitability, and will be conducted based on the requirements of the national planning and layout support areas. A total-quantity control approach will be adopted, and enterprises will be selected through a competitive process.

　　The “Administrative Measures for the Identification of Key Software Enterprises and Integrated Circuit Design Enterprises within the National Planning and Layout” shall be formulated separately by the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Finance, the State Administration of Taxation, in conjunction with relevant departments.

　　12. The criteria for identifying newly established enterprises referred to in this notice shall be implemented in accordance with the "Notice of the Ministry of Finance and the State Administration of Taxation on the Criteria for Identifying Newly Established Enterprises Eligible for Preferential Corporate Income Tax Policies" (Cai Shui [2006] No. 1).

　　13. The policy guidelines for research and development expenses referred to in this notice shall be implemented in accordance with the "Notice of the State Administration of Taxation on Issuing the ” (Guo Shui Fa [2008] No. 116).

　　14. For the purposes of this notice, the “profitable year” refers to the tax year during which the enterprise’s taxable income for that year exceeds zero.

　　15. The “integrated circuit design and sales (operating) revenue” referred to in this notice refers to the revenue generated by integrated circuit enterprises from the research and development, design, and sale of integrated circuit (IC) functions.

　　16. The software product development and sales (operating) revenue referred to in this notice refers to the revenue generated by software enterprises from the development and sale of software products such as computer software, information systems, or embedded software, as well as the revenue from technical services including information system integration services, information technology consulting services, and data processing and storage services.

　　17. Enterprises that, in accordance with the provisions of this notice, are eligible for tax incentives only after obtaining the relevant certification shall obtain such certification prior to the final tax settlement for corporate income tax in the year in which they become profitable or in the following year. If the relevant certification is obtained before the final tax settlement for corporate income tax in the year following the year in which the enterprise becomes profitable, the enterprise may enjoy the corresponding periodic tax reduction and exemption benefits starting from the year in which it became profitable. However, if the relevant certification is obtained after the final tax settlement for corporate income tax in the year following the year in which the enterprise becomes profitable, the enterprise shall, from the date it obtains the certification, enjoy the remaining term of the applicable periodic tax reduction and exemption benefits, calculated from the year in which it became profitable.

　　18. Enterprises meeting the conditions stipulated in this Notice shall, within four months from the end of the fiscal year, complete the procedures for tax reduction and exemption with the competent tax authority in accordance with the provisions of this Notice and the "Notice of the State Administration of Taxation on Issues Concerning the Administration of Enterprise Income Tax Reduction and Exemption" (Guo Shui Fa [2008] No. 111). When handling the tax reduction and exemption procedures, enterprises shall provide legally valid supporting documentation.

　　19. Enterprises enjoying the above-mentioned tax incentives shall have their eligibility for such incentives revoked and shall pay retroactively the corporate income tax that was previously exempted or reduced if any of the following circumstances apply:

　　(1) Providing false information during the application and recognition process;

　　(2) Engaging in tax evasion or fraud;

　　(3) In the event of a major safety or quality incident;

　　(4) Having engaged in environmental or other illegal or non-compliant activities and received penalties from the relevant authorities.

　　20. Enterprises enjoying tax incentives shall, within 15 days from the date of any change in their eligibility criteria for such incentives, report the change to the competent tax authority. If an enterprise no longer meets the eligibility criteria for tax incentives, it shall fulfill its tax obligations in accordance with the law. The competent tax authority shall recover any taxes that have not been paid in compliance with the law. Meanwhile, during the implementation of tax incentive policies, if the competent tax authority finds that an enterprise does not meet the eligibility requirements for enjoying these incentives, it may temporarily suspend the relevant tax incentives enjoyed by the enterprise.

　　21. Prior to December 31, 2010, enterprises that have been recognized and are eligible for the original preferential tax reductions and exemptions as stipulated in Article 1 of the “Notice of the Ministry of Finance and the State Administration of Taxation on Several Preferential Policies for Enterprise Income Tax” (Cai Shui [2008] No. 1) may continue to enjoy such benefits until the expiration date following the implementation of this notice.

　　22. If the preferential corporate income tax policies that integrated circuit manufacturing enterprises, integrated circuit design enterprises, software enterprises, and other entities are eligible to enjoy under this Notice overlap with other corporate income tax preferential policies of the same nature, the enterprise shall choose the most favorable policy and implement it exclusively; the policies shall not be stacked or enjoyed concurrently.

　　23. This notice shall take effect as of January 1, 2011. The provisions set forth in Article 1, items (1) through (9), of the “Notice by the Ministry of Finance and the State Administration of Taxation on Certain Preferential Policies for Enterprise Income Tax” (Cai Shui [2008] No. 1) shall cease to be effective as of January 1, 2011.

　　Ministry of Finance, State Administration of Taxation

　　April 20, 2012