China Releases Administrative Measures on Software Enterprise Recognition

Apr. 1 – With the view to promote the development of the software industry in China, the Ministry of Industry and Information Technology (MIIT), together with three other central departments, released the “Administrative Measures for Software Enterprise Recognition (gongxinbulianruan [2013] No. 64, hereinafter referred to as ‘Measures’)” on February 6, which lists out the requirements for software enterprise recognition in China. Detailed information can be found below.

Eligibility Requirement

The Measures provide that the recognition of software enterprises shall be carried out pursuant to the “Circular on Corporate Income Tax Policies for Software Industry and Integrated Circuit Industry (caishui [2012] No.27, hereinafter referred to as ‘Circular’).”

According to the Circular, a qualified enterprise refers to an entity that mainly engages in software development and meets the following conditions:

• The enterprise shall be legally established in China after January 1, 2011, and shall have obtained the appropriate software qualifications.
• The number of the enterprise’s employees with associate degrees or above shall account for no less than 40 percent of the total number of employees; and the number of researchers and developers shall account for no less than 20 percent of the total number of employees.
• The enterprise shall have core technologies, and its total R&D costs in the current year shall account for no less than 6 percent of the total sales (business) income, among which, the R&D costs incurred within China shall account for no less than 60 percent of the total R&D costs.
• The enterprise’s sales (business) income from software development and sales shall account for no less than 50 percent of its total income, among which, the sales (business) income from independent software development and sales shall account for no less than 40 percent of its total income.
• The enterprise shall have independent intellectual property rights for its primary businesses.
• The enterprise shall establish a quality management system that satisfies the software engineering requirements and provide document records of effective operations.
• The enterprise shall have production and business premises that are suitable for software development, and have the technical support related to services provided.

The competent provincial authorities shall evaluate the application for software enterprise recognition within 20 working days upon the receipt of all application materials, and send the list of qualified enterprises to the MIIT. The MIIT will then publish the list online for seven working days and, if no objection has been raised during that period, the MIIT will grant the record-filing for such enterprises.

Tax Preferential Policy

According to the Circular, a qualified software enterprise is entitled to the following tax preferential policies:

• The enterprise’s corporate income tax shall be exempt for the first and second year, and shall be levied at 25 percent for the third year to fifth year; such preferential periods shall be calculated from the profit-making year till December 31, 2017.
• Valued-added tax payment refunds obtained by the qualified software enterprise in accordance to the “Notice on Value-Added Tax Policies for Software Products” may be deducted from the total income when calculating the taxable income.
• Employee training expenses of the qualified enterprise shall be subject to separate accounting, and the actual amount incurred shall be deducted for the purpose of calculating taxable income.

Furthermore, key software enterprises included in the national plan that have not enjoyed tax exemption preferences in the current year may pay corporate income tax at a reduced rate of 10 percent.

The Measures are scheduled to take effect on Apirl 1, 2013.

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