It pays to know where you stand on R&D

Additionally, the reform of value-added tax offers potential tax benefits to enterprises carrying out R&D activities. Many services that were previously subject to business tax are now subject to value-added tax. As a result, the tax burden of many foreign-invested enterprises may fall considerably.

For example, R&D activities such as technical consulting and technology licensing that were previously subject to business tax are now subject to value-added tax, but the key difference is that foreign-invested enterprises can now offset their value-added tax payable. This ultimately means more money in the hands of the taxpayer.

Encouraging and fostering R&D activities is also now a national policy, and is a key tenet of the 12th Five-Year Plan. Such R&D incentives include:

A 50 percent R&D "super deduction" in addition to the actual expense deduction for R&D spending. So if a company spends 10 million yuan ($1.6 million; 1.26 million euros) on eligible R&D it will receive a net benefit of 1.25 million yuan (12.5 percent benefit for every eligible cost);

A preferential corporate income tax rate of 15 percent (the standard rate is 25 percent) for companies recognized as a High New Technology Enterprise;

A preferential corporate income tax rate of 15 percent for companies recognized as an Advanced Technology Service Enterprise, with qualified incomes exempt from business tax;

Exemption from import customs duty and value-added tax on qualified R&D equipment imported by R&D centers.

As R&D is very widely defined for tax purposes in China, the scope of activities that may qualify for the incentives, in particular the R&D super deduction, is broader than most companies appreciate.

R&D activities potentially eligible for Chinese government incentives in various industry sectors could include:

New techniques or methodologies to extract minerals from complex ore bodies.

Improvements to water use and irrigation technologies.

Development of innovative functionality and improved approaches to solving software problems.

Application of engineering principles, previously developed in the aerospace industry, in, for example, the automotive industry.

Computer-aided engineering and simulation software developed as part of a larger R&D project in any industry.

Development of new processes and technologies to minimize adverse environmental impacts across all industries.

Development of new compounds with improved therapeutic properties.

Development of non-destructive testing techniques to analyze material fatigue with pharmaceutical products.