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A 360-Degree Look: How China’s New EIT Incentive Rules Can Encourage R&D Activities in China

During the course of its economic transformation, China has become more and more aware of the importance of the role played by research and development (“R&D”) activity. As the country’s manufacturing industry is shrinking, China hopes very much that the R&D industry can take the baton and run and become the cornerstone of its new economy. To stimulate innovation, China, like many other jurisdictions, has been revamping the enterprise income tax (“EIT”) incentive rules within the current legal framework in recent years. On one hand, China has relaxed the requirements and procedures for R&D activities to be eligible for the EIT incentives with a view to attracting more R&D investment and retaining more of the income generated by intellectual property (“IP”) within China. On the other hand, given the latest BEPS development, China’s attitude towards tax avoidance has become tougher, aiming to close any loopholes in the EIT incentive system. Given the rapid changes in China’s tax environment, multinational enterprises (“MNEs”) need to review and adjust their R&D-related operations in China from time to time to maximise any tax benefits that could be obtained but at the same time minimise the potential tax risks.