China Regional Focus: Cash Incentives for High-tech Companies in Guangdong Province
By Dezan Shira & Associates
Editor: Weining Hu
On October 14, 2016, Guangdong province’s Department of Finance and Department of Science and Technology jointly released Work Measures for Implementation of Guangdong Province High Tech Enterprises Incubation Program (Measures). The measures include financial incentives to attract investment into the province’s significant tech industry.
Starting from 2008, the Chinese central government has launched a series of tax incentives to support the growth of high and new technologies enterprises (HNTEs). Companies licensed with the HNTE Certification are eligible to take advantage of corresponding financial benefits, such that these HNTEs can enjoy a 15 percent corporate income tax reduction and obtain staff training reimbursement.
Despite the appealing financial incentives, only a handful of HNTEs had successfully obtained the HNTE Certification. This is because the license’s acceptance requirements are too high for many startups and small and medium companies. With an aim to nurture more licensed HNTEs, many provincial governments have established local HNTE ‘incubators’, programs that deploy government funds to help HNTEs grow their businesses so that they can become qualified candidates to obtain the HNTE Certification. Below provides a detailed description of the financial incentives provided by Guangdong province to its incubator program’s member enterprises.
According to the most recent financial incentives for HNTEs in Guangdong province, if an HNTE meets the application requirement and successfully registers as a member in the Guangdong HNTE Incubation Program, the HNTE can receive a one-time government fund valued at five percent of the corporate income tax from the prior fiscal year. If the estimated fund is less than RMB 300,000, then the Guangdong government will afford RMB 300,000 to the subject company; if the calculated number exceeds RMB 3 million, then a maximum of RMB 3 million will be offered to the subject company.
Additionally, upon graduating from the incubation program, a member enterprise will receive another financial award for obtaining the state-level HNTE Certification. Similar to the aforementioned calculation, a licensed HNTE will receive a one-time government fund valued at five percent of the corporate income tax from the prior fiscal year. An HNTE can receive a financial support package of as much as RMB 6 million from the Guangdong Provincial government if it registers in the incubation program and obtains the HNTE Certification.
Guangdong has allocated RMB 600 million to reward qualified candidates. The incubation program is currently expected to last for three years.
Status eligibility and requirements
Enterprises seeking to become a member of the Guangdong Province Incubation Program must meet the following criteria:
- Company’s key technologies or services must operate within the specified fields stated in the Catalogue of National Key Support High New Technology;
- Be a company registered within Guangdong province (excluding Shenzhen) for more than one year with independent legal entity status, and has not already obtained HNTE Certification;
- Have acquired the intellectual property (IP) rights that technically support their main products (services) by means of independent research and development (R&D), purchasing, transferring, acquisition, etc;
- The technical personnel of enterprises engaged in research and development and related technological innovation activities account for no less than six percent of the total number of employees in that year;
- In the last two financial years, R&D expenditure accounts for sales income is not less than three percent; R&D expenditure within Guangdong province account for total R&D expenditure is not less than 60 percent; for companies that have been established for less than two years, the calculation should be based on the actual operating time;
- In the most recent financial year, the ratio of income derived from high new technology products or services against total revenue is not lower than 40 percent; and
- Have professional accounting management that can supervise R&D expenditure.
The following is a list of relevant material to be submitted along with a high-tech enterprise status application:
- Guangdong provincial HNTE Incubation Program registration documents;
- Corporate registration documents that prove legal establishment;
- IP-related materials, scientific research project certification, scientific and technological achievements, the organization and management of R&D, and other related materials;
- Supportive documents that illustrate the ratio of technicians against general staff;
- Audit reports conducted by a certified third party that show R&D expenditure and income derived from high new technology products or services;
- Financial reports for the two most recent fiscal years conducted by a certified third party. The report should include balance sheets, profit and loss statements, and cash flow statements; and
- Corporate income tax return statements for the two most recent fiscal years.
Implications for foreign-invested companies in China
Many foreign-invested companies find it difficult to get HNTE certifications in comparison to their domestic counterparts. However, the low acceptance rate for foreign companies has less to do with legal hurdles and more with application credentials.
Many foreign companies set up their R&D centers outside of China, and therefore fail to meet the requirement for R&D input. Additionally, foreign companies tend to register their IP rights overseas rather than in China, thus failing the requirement for patent rights.
Whether to qualify for the national-level HNTE Certification or the Guangdong provincial-level incubation program, foreign companies should consider adjusting the distribution of their R&D investments and ensure IP registration in China. Only companies that meet the application requirements can take advantage of the financial support set forth for HNTEs.
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