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China has provided clarification on certain Value Added Tax (VAT) incentives for purchase of equipment by foreign-funded Research and Development (R&D) centers. In a recent circular, authorities provided additional guidance on the eligibility requirements and criteria for claiming the tax exemption.

China VAT R&D: Highlights from Circular (93)

Clarification of certain criteria for import VAT exemption for foreign-funded R&D centers (Circular 115)

• Circular (93) clarifies that the relevant commerce authorities must approve the establishment of foreign-funded Research and Development centers.

• Circular (93) specifies that the annual R&D expenditure (as stated in Circular 115) refers to the average annual R&D expenditure of the last two years.

• Circular (93) provides the definition of full-time R&D personnel (as stated in Circular 115).

• Circular (93) clarifies that equipment orders already made and where the delivery is by the end of 2010 can be regarded as qualifying equipment.

Verification of eligibility requirements

Circular (93) clarifies that relevant commerce authority will review and inspect the application of the foreign-funded Research and Development center. It also specifies that status of the approved foreign-funded Research and Development centers will be revisited every two years. For centers that are disqualified, the VAT exemption and VAT refund will be revoked.

Supervision of tax exempted/refunded equipment

Circular (93) clarifies that there is emphasis on the supervision of the tax exempted or refunded equipment. A foreign-funded Research and Development center could incur a penalty for transfer, sale, disposal or use of the equipment for another purpose without approval.

China VAT R&D: The Background

Earlier, authorities allowed general VAT taxpayers to deduct input VAT incurred on purchases of fixed assets from their output VAT. Exemption from import VAT on equipment for R&D centers was also abolished, adversely affecting the R&D centers as they are not general VAT taxpayers and cannot credit input VAT incurred on purchased equipment against the output VAT. Later authorities moved to resolve this issue and the Ministry of Finance (MOF), General Administration of Customs (GAC) and State Administration of Taxation (SAT) jointly issued a circular (Circular 115) stating import VAT Tax exemption is available on equipment imported by R&D centers and a full VAT refund is available on domestically-manufactured equipment purchased by the centers.

VAT Exemption on Imported Equipment

The import VAT exemption to foreign-funded Research and Development centers includes independent legal entities, R&D departments or R&D branches of foreign-invested companies provided certain conditions are met.

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