On August 4, 2020, China’s State Council released the Policies of Promoting High-quality Development of Integrated Circuit Industry and Software Industry (Guo Fa  No.8).
The document lays out a wide range of policies to shore up the development of the integrated circuit (IC) and software industries, applying to all companies registered in China, regardless of nationality.
China has provided support policies for the two sectors since 2000, which are updated every decade – this is the second such update since their roll-out.
Compared with the policies introduced in 2000 and 2011, the new policies are more generous and broader and include a series of tax incentives, streamlined domestic listing procedure, financial support from government-invested funds, improved intellectual property rights (IPR) protection, as well as policies to promote related research, trade, education, market application, and international collaboration.
Under the new policy, qualifying IC production enterprises or projects that employ integrated circuit line width of no more than 28 nanometers (nm) and have operated for more than 15 years will be exempt from CIT for as many as 10 years.
For encouraged IC manufacturing enterprises or projects with integrated circuit line width that is no more than 65 nm and operation period of over 15 years, they can enjoy CIT exemption for the first five years, and a half-rate tax deduction of the 25 percent CIT deduction (that is, 12.5 percent) in the subsequent five years.
For encouraged IC manufacturing enterprises or projects with integrated circuit line width no more than 130 nm and operation period of over 10 years, they can enjoy tax exemption for the first two years and a half-rate tax reduction (that is, 12.5 percent) in the following three years.
In addition, where an encouraged IC manufacturing enterprise that employs integrated circuit line width that is no more than 130 nanometers incurs a loss in a tax year, the enterprise is allowed to carry the loss forward to subsequent years, provided the loss carried forward does not exceed 10 years (note: for normal enterprises, the loss carried forward generally cannot exceed five years).
The abovementioned tax incentives count starting from the first profit making year for the IC enterprise, or the first business revenue collection year for the IC project.
The list of encouraged IC manufacturing enterprises or projects will be drawn up by the National Development and Reform Commission (NDRC) and the Ministry of Industry and Information Technology (MIIT), together with other relevant authorities.
According to a report by the South China Morning Post, currently only two semiconductor foundries – Semiconductor Manufacturing International Corporation (SMIC) and Shanghai-based Hua Hong Semiconductor Ltd. – are producing chips using the 28 nm processing node and are expected to benefit the most from the new policy. Other semiconductor foundries generate most of their revenue from products at 55 nm and above, which may include companies like Unic Memory, SK Hynix Semiconductor China Ltd., and Hangzhou Silan Microelectronics Co. Ltd. Many listed semiconductor companies have been profitable for more than 10 years, so they can’t benefit from the tax exemptions, but their newly established subsidiaries can.
For encouraged enterprises engaging in IC design, IC equipment, IC materials, IC packaging, and IC testing as well as software enterprises – they can enjoy tax exemption for the first two years and a half-rate tax reduction (12.5 percent) in the following three years, starting from the first profit making year of the enterprise.
The qualification of encouraged IC design, equipment, materials, packaging, and testing enterprises will be drawn up by the MIIT together with other relevant authorities.
Key IC enterprises and software enterprises can enjoy tax exemption for the first five years and a reduced 10 percent CIT rate in the following years, starting from the first profit making year of the enterprise.
The list of key encouraged IC enterprises and software enterprises will be drawn up by the NDRC, MIIT, together with other relevant authorities.
IC enterprises and software enterprises will continue to enjoy the current preferential VAT treatment for the moment.
For example, a VAT general taxpayer selling software products developed and produced by itself, or selling imported software products upon conversion for local use, shall enjoy VAT refund for the portion of actually paid VAT that exceeds three percent at the time of tax collection.
In the given period, qualified enterprises shall enjoy import tariff exemption for certain products:
IC manufacturing enterprises producing logic circuit with line width that is no more than 65 nanometers, storage production enterprises, and enterprises producing IC with line width no more than 0.25 micrometers and in special processes (including mask template and silicon wafer no less than 8 inches) – all will be exempted from import tariffs when importing self-use productive raw materials, consumables, special building materials used in decontamination chamber, IC production equipment spare parts, and supporting systems.
Compound IC manufacturing enterprises with line width of no more than 0.5 micrometers and advanced IC packaging and testing enterprises – all will be exempted from import tariffs for importing self-use productive raw materials and consumables.
Key encouraged IC enterprises, key encouraged software enterprises, and enterprises mentioned in Category A will be exempted from import tariffs for importing self-use equipment, technologies (including software), accessories, and spare parts coming along with the equipment in accordance with the contract, except the goods listed in the relevant non-duty-free import commodity list
The details of this preferential policy shall be formulated by the Ministry of Finance (MOF), the General Administration of Customs (GAC), together with other relevant authorities. And the list of qualified enterprises and the tariff-exempted product catalog shall be drawn up by NDRC, MIIT, together with other relevant authorities.
In the given period, major IC projects shall be allowed to pay import VAT by installment for importing self-use new equipment.
The details of this preferential policy shall be formulated by the MOF and GAC, together with other relevant authorities.
The government will support eligible IC and software companies to list and raise money at home and abroad, assist qualifying companies to list on China’s sci-tech innovation board (STAR market) and growth enterprise market (gem), and speed up the domestic listing review process.
Besides stock market financing, companies will also be encouraged to adopt debt financing tools and issue corporate bond, short-term financing bills, and mid-term notes. The policy also calls to use the state or local government-backed funds to bolster the development of IC and software industries.
Local government should help IC and software companies obtain commercial loans through various means, such as intellectual property (IP), equity, and accounts receivable pledging financing as well as enhance financing guarantee services for smaller companies.
Financial institutions should strengthen their medium- and long-term loan support and launch innovative credit products for IC and software companies.
In support of IC and software technology research and development projects, the policy identifies the direction of semiconductor development, with emphasis on high-end chips, IC equipment, IC key materials, and IC design tools, which are areas where Chinese technology is relatively backward. The policy calls on government at all levels to support these priorities.
Within a certain period, key IC design enterprises and software enterprises can go through the customs formalities for temporary entry of goods to import self-use equipment (including development and testing equipment), hardware and software environment, prototype, and components.
In addition to the above measures, the policy also appeals for setting up first-level disciplines of IC, encouraging universities to collaborate with enterprises in talent cultivation, enhancing IPR protection for IC layout-design exclusive rights and software copyrights, standardizing IC and software market order, and deepening global cooperation in R&D and supply chain.
Despite the recent deteriorating technology relations between US and China, Chinese leaders had already made up their minds to pursue a state-led strategy to bolster the IC and software sectors – as seen in the nation’s ambitious “Made in China 2025” plan, policymakers had set a strategic goal of producing 40 percent of all semiconductors used by China by 2020 and 70 percent by 2025. However, the percentage is only about 15 percent currently.
With threat of the US President Donald Trump’s administration cutting off supplies of US-manufactured chips to China and the extension of trade war hostilities to the technology realm involving 5G and the internet – China’s strategic response will be based on bolstering domestic knowledge, production, and innovation capacity. Recent events have resurfaced very real worries of a technology decoupling – in May this year, Washington DC introduced a new rule that restricted Huawei from buying chips from Taiwan Semiconductor Manufacturing Company (TSMC); in June, the US Commerce Department added 33 Chinese firms and institutions to its entity list where backlisted items will face export control of US goods; and recently, social media apps with ties to China like TikTok and WeChat are facing bans or strict supervision. Its no surprise that China is doubling down on its policy support to make home-based high-tech industries more self-reliant.
In the first half of 2020, China has produced more than 100 billion IC chips, up 16.4 percent year-on-year, thanks to the country’s grand construction of 5G, Wen Ku, head of the MIIT, said. However, the nation still lacks the ability to produce the most advanced chips – the current state-of-the-art 7nm process can only be made by overseas foundries, such as TSMC and Samsung Electronics, and possibly will be made by US chip giant Intel in about 12 months.
China is still in need of foreign capital and technology in the IC and software industries, which are clearly included in country’s catalogue of encouraged industries for foreign investment.
Thus, China as the world’s largest market for semiconductor equipment remains appealing for foreign investors. What is also noteworthy is that Chinese companies are encouraged to cooperate with overseas research institutes and foreign companies and are welcome to build R&D centers in China.
For more information or assistance in finding the right market entry strategy for your business, choosing a location for your investment, setting up, or tax planning, please feel free to contact our local advisors at China@dezshira.com.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong.
Please contact the firm for assistance in China at email@example.com. We also maintain offices assisting foreign investors in Vietnam, Indonesia, Singapore, The Philippines, Malaysia, Thailand, United States, and Italy, in addition to our practices in India and Russia and our trade research facilities along the Belt & Road Initiative.
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