International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

New Chinese tax incentives for innovation and private pension provision

Sponsored by


Following on from the annual meeting of China's Parliament, the National People's Congress (NPC), in early March, the Chinese government has been implementing a string of tax reform measures, the most recent of which was the VAT rate reductions.

At an executive meeting of China's State Council on April 25 2018, Premier Li Keqiang outlined seven further tax reduction measures, this time relating to the corporate income tax (CIT) treatment of innovation activities.

  • Under China's research and development (R&D) super deduction incentive, a 150% deduction (i.e. a 50% bonus deduction) is available for eligible R&D expenses. This rises to 175% for science and technology small and medium enterprises (SMEs). However, under rules issued in 2015, Chinese enterprises outsourcing research work to domestic service providers have faced an 80% deduction cap, which applies to both the expense itself and the super deduction bonus (i.e. a payment of RMB 100 ($16), which would otherwise bring with it an RMB 50 bonus deduction, delivers a tax deduction of just RMB 120 following the application of the 80% cap). For payments to overseas service providers, while no 80% cap was applied, the super deduction bonus was denied. Under a new rule change, the disallowance of the super deduction bonus for payments to overseas service providers is abolished. As the 80% cap for payments to domestic service providers is still in place, this could mean that payments to overseas service providers will deliver a greater tax deduction. However, it remains to be seen if this cap might, in practice, be extended to payments to overseas service providers, as well. The new treatment is retroactively effective from January 1 2018, with detailed rules to follow.

  • China applies a general restriction of a five-year carry-forward period to tax losses. This will now be extended to 10 years for high and new technology enterprises (HNTEs) and science and technology SMEs. This recognises the fact that such enterprises may encounter several years of losses before a new innovation becomes profitable. The new treatment is retroactively effective from January 1 2018, with detailed rules to follow.

  • China applies a limitation to tax deductions for staff education expenses. The limit is set at 2.5% of the enterprise's salary bill, though a special 8% ceiling has applied for some time to advanced technology services enterprises (ATSEs) and HNTEs. The 8% limitation is now being expanded to all enterprises nationwide. The new treatment is retroactively effective from January 1 2018, with detailed rules to follow.

In addition to these new tax preferences for enterprise innovation, the government is also looking to foster the greater use of private pensions through individual income tax (IIT) regime changes. Private pensions are treated as the third of three pillars in China's pension insurance system. The mandatory first pillar is government schemes funded with social security contributions, and the second pillar is a voluntary or supplementary pension benefit called the enterprise annuity. In light of China's ageing population, the government has concluded that the third pillar needs to be bolstered further.

To this end, China is putting in place an exemption-exemption-taxation (EET) system of the sort in use in many other countries, such as the US's 401K regime. This is being piloted in Shanghai, Fujian and Suzhou Industrial Park from May 1 2018, and applies to so-called voluntary commercial endowment plans, a form of private retirement plan, as follows:

  • Contributions to an eligible commercial endowment insurance plan, deposited in an individual retirement account (IRA), are allowed to be deducted for IIT purposes;

  • Investment gains generated by the funds in the IRA are treated as tax exempt; and

  • IIT applies when the amounts in the IRA are withdrawn at retirement.

While the pilot programme is initially just in place for one year, where the government is satisfied with how the reform has proceeded, it may subsequently look to roll this programme out to the whole country.





Lewis Lu

Khoonming Ho ( and Lewis Lu (

KPMG China

Tel: +86 (10) 8508 7082 and +86 (21) 2212 3421


more across site & bottom lb ros

More from across our site

The German government unveils plans to implement pillar two, while EY is reportedly still divided over ‘Project Everest’.
With the M&A market booming, ITR has partnered with correspondents from firms around the globe to provide a guide to the deal structures being employed and tax authorities' responses.
Xing Hu, partner at Hui Ye Law Firm in Shanghai, looks at the implications of the US Uyghur Forced Labor Protection Act for TP comparability analysis of China.
Karl Berlin talks to Josh White about meeting the Fair Tax standard, the changing burden of country-by-country reporting, and how windfall taxes may hit renewable energy.
Sandy Markwick, head of the Tax Director Network (TDN) at Winmark, looks at the challenges of global mobility for tax management.
Taxpayers should look beyond the headline criteria of the simplification regime to ensure that their arrangements meet the arm’s-length standard, say Alejandro Ces and Mark Seddon of the EY New Zealand transfer pricing team.
In a recent webinar hosted by law firms Greenberg Traurig and Clayton Utz, officials at the IRS and ATO outlined their visions for 2023.
The Asia-Pacific awards research cycle has now begun – don’t miss on this opportunity be recognised in 2023
An intense period of lobbying and persuasion is under way as the UN secretary-general’s report on the future of international tax cooperation begins to take shape. Ralph Cunningham reports.
Fresh details of the European Commission’s state aid case against Amazon emerge, while a pension fund is suing Amgen over its tax dispute with the Internal Revenue Service.