On the 10 December 2008, the PRC State Administration of Taxation announced a plan to provide benefits to certain R&D firms by allowing 'super-deductions' of 150% to certain pre-tax expenses.

To qualify for the scheme, the announcement states that firms must be carrying out R&D activities with clearly-defined purposes on a continuous basis and systematically carried out in order to come up with new scientific/technical knowledge, including:

• applying new science/technology knowledge in a novel way;
• improving current technologies, products, services or techniques in a meaningful way.

The firm must also fall into one of the specified industry types on one of two 2007 lists of 'prioritised high technology' industries.

If a firm can successfully be classified as carrying out 'R&D activities' based on the above criteria, then it can claim 150% of the value for the following types of expenses as an income taxes deduction:

• Design fees for new products, expenses for formulating procedures relating to new skills, and expenditures for technical books and information and translation fees directly related to R&D activities;
• Materials, fuel and power consumed directly for R&D activities;
• Salaries, wages, bonuses and allowances of employees directly engaged in R&D activities;
• Depreciation expenses or rentals for tools and equipment exclusively used for R&D activities;
• Amortization expenses of intangible assets such as software, patents, non-patented technologies exclusively used for R&D activities;
• Development and manufacturing costs of equipment and moulds exclusively used for intermediate testing
• and experiments;
• On-site testing expenditures for exploration technology;
• Expenditures for verification, assessment and inspection of R&D results.

According to several sources, the implementation of the super-deductions was very location-specific, with local authorities granting or disallowing deductions based on their own interpretation of the criteria.

The policy came into effect retroactively from the start of 2008.

UPDATE: In September 2013, the definitions were laid out more specifically in Caishui 2013/70, which confirmed that the following types of expenses will be eligible:

• Basic pension fund, basic medical insurance, work-related injury insurance, unemployment insurance, maternity insurance and housing fund contributed by a company for its employees directly engaging in R&D activities in accordance with regulations set by the State Council or relevant provincial-level government authorities;
• Costs of operational maintenance, adjustment, testing, and repair of tools and equipment incurred exclusively for R&D activities;
• Costs of samples and prototypes that do not constitute fixed assets, and expenses for general testing solutions;
  Clinical trial costs for R&D activities for new drugs;
• Certification cost for R&D results.

Previously, the list was less well-defined and led to local tax authorities interpreting it in different ways, and denying deductions for firms when they should indeed have received them. This new announcement is intended to rectify this.

In 2015, some of the definitions were rewritten. Please see related state acts for more information.