China CIT New Preferences | Digitalization and Intellectualization of Special Equipment (2)
The Ministry of Finance and the State Administration of Taxation (SAT) jointly issued the «Announcement on the Enterprise Income Tax Policies for the Digital and Intelligent Transformation of Special Equipment for Energy and Water Conservation, Environmental Protection, and Work Safety» (“Announcement”).
Previously, we have introduced the concept of special equipment, the main aspects of digital and intelligent transformation, as well as the CIT crediting criteria.
In this sector, we will continue to discuss the following parts.
- Requirement for accounting and regulatory
Companies should carry out separate accounting for the inputs of digitalization and the intelligent transformation of special equipment, and accurately and reasonably collect the expenditures; if companies carry out digitalization and intelligent transformation of multiple special equipment in one tax year, they should collect the relevant expenditures according to the different special equipment respectively. Companies shall not enjoy tax incentives if the relevant expenditures are not delineated.
Companies enjoying the tax incentives shall formulate the digitalization and intelligent transformation plan of special equipment in advance or obtain the technology development contract or technology service contract registered by the technology contract recognition and registration agency and keep the relevant information for inspection.
If the tax authorities cannot accurately determine whether the digitalization and intelligent transformation of special equipment is a part of the policy implementation process, they may refer to the industry and information technology departments at or above the prefectural and municipal levels, together with the science and technology departments, for appraisal.
- Management of the company’s renting of special equipment
Specialized equipment of the lessee companies (specialized equipment leased in the form of financial leasing, and it is agreed in the financial leasing contract that at the expiration of the lease term, the ownership of the leased equipment has been transferred to the lessee enterprise), the digitalization and intelligent transformation inputs incurred can enjoy the tax incentives on company income tax.
If the ownership of the leased equipment is not transferred to the lessee companies after the expiration of the financial leasing period, then the lessee company shall cease to enjoy the tax incentives on corporate income tax and pay back the one that has been credited.
- Other provisions
Companies enjoying tax incentives should use the transformed special equipment themselves. If the company transfers or leases the special equipment within five tax years after the completion of the transformation of the special equipment, it shall stop enjoying the tax incentives treatment in the month when the special equipment is no longer in use and make up for the corporate income tax that has been credited.
- Implementation period
1 January 2024 to 31 December 2027
- Case study
[Case One]
Company A is a production company, for energy saving and emission reduction needs, an old equipment (in the equipment catalog contained in the special equipment) is digitally and intelligently transformed.
The original tax basis (historical cost) of the old equipment is 10 million RMB, and the renovation costs 4 million RMB (less than 50% of the tax basis.) The company will generate a profit of 5 million RMB in 2024, and the CIT rate is 25%.
→CIT payable in 2024 is: 5 million * 25% = 1.25 million RMB
→ According to the policy, the CIT deduction for the cost of transformation is: 4 million * 10% = 0.4 million RMB
→ The actual CIT paid is 1.25 – 0.4 = 0.85 million RMB
[Case Two]
Following up on Case One above, if the above company generates a profit of 1 million RMB in 2024, then –
→ CIT payable in 2024 is: 1 million * 25% = 0.25 million RMB
→ According to the policy, the CIT deduction for the cost of transformation is: 4 million * 10% = 0.4 million RMB
→ The actual CIT paid is: 0.25 – 0.4 < 0 RMB (no CIT will be paid in the current year, and the remaining credit, that is, 0.4 – 0.25 = 0.15 million RMB, can continue to be deducted in the next five years)
The above is all our sharing of this Announcement. If there are any additions or other questions, please contact us.