Q1: Can you provide us Practical Guides on Application of Additional Deduction of R&D Expenses?
1. Brief Introduction on Additional Deduction Policies
According to Law of the People's Republic of China on Enterprise Income Tax, R&D expenses incurred for developing new technologies, products or techniques are subject to additional deduction when the amount of taxable income of an enterprise is calculated. Specifically, additional 50% deduction of the R&D expenses incurred from the research and development of new technologies, new products and new techniques could be deducted on the basis of the actual deductions if no intangible asset has been formed and included in the current profits and losses; where intangible asset has been formed, such expenses shall be amortized at 150% of the cost of the intangible asset.
2. Application Process
Enterprises shall submit relevant additional deduction documents to tax authorities when filling annual enterprise income tax returns (within five months from the end of a taxable year) and shall fill in the amount of additional deduction in Statement of Tax Breaks (Annual Tax Return Form for Enterprise Income Tax Annexes 5) as required. The detailed application process as follows:
Q2: What are the Tax Treatment and Risks of Nominal Share-holding
A: Please see the following case study:
A hotel held 1.63% shares of a security company as a nominal shareholder while the actual shareholder was an investment corporation. As the security company going public, the hotel sold these shares in batches after destabilization of non-tradable shares with net income of 160 million. Actually, this trade involved in share transfer, nominal share-holding contract, sale and other processes, which was rather complicated regarding tax treatment.
Through investigation and analyses, Wuhan tax authority confirmed the hotel as the taxpayer, and collected enterprise income tax on basis of trade price. No income tax shall be collected when the rest of income was diverted from the hotel (the nominal shareholder) to the investment corporation (the actual shareholder).
Eventually, the maximum income tax on equity transfer in Wuhan had been collected smoothly. The transfer income came to 140 million Yuan and the income tax hit 3.473 million Yuan.
Nominal share-holding here refers to a situation that the actual shareholder reaches an agreement with the nominal shareholder, in which case the nominal shareholder could enjoy investment rights and obligations belonging to the actual shareholder, in its own name. It often happens in real life. However, the actual shareholder often gets troubled by tax issues when he plans to terminate the agreement. Normally, the actual shareholder cannot get approval from tax authority without enough evidence, and is often required to pay income tax on the base of fair value. It's unfair for the actual shareholder because no share transfer happens and no transfer income is acquired actually.