China Tightens Grip on Semiconductor 'Guksanhwa', Boosts Tax Benefits for Integrated Circuit R&D

The Chinese government has decided to extend the tax credit for R&D (research and development) expenses of integrated circuit and machine tool companies for five years. This is interpreted as a measure to accelerate the 'domestication' of China's advanced technology.

On the 18th, the Ministry of Finance, the State Taxation Administration, the National Development and Reform Commission, and the Ministry of Industry and Information Technology announced an adjustment notice on the tax credit rate containing this content, according to Economic Observer.

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The Chinese government provides a tax credit of 120% of the expense amount accounted for R&D investments by integrated circuit companies and machine tool companies. The applicable period is from January 1 of this year to December 31, 2027.

If the recognition requirements for intangible assets are met and capitalized in the accounting books, 220% of the investment amount can be treated as an expense. For amounts accounted as expenses in accounting, 120% is recognized as a tax expense, and if capitalization requirements are met, 220% can be expensed under tax law.

R&D investments are usually accounted for as expenses in accounting and are only recognized as assets when technical feasibility is proven. If this measure is applied, when Chinese companies increase R&D investments, the amount recognized as 'expenses' under tax law increases. As a result, they can pay significantly less tax. This is why it is interpreted as a de facto 'corporate tax reduction measure' to promote the 'domestication of technology' emphasized by China.

This content was produced with the assistance of AI translation services.