China guidance addresses new tariff and tax incentives for integrated circuit, software industries

By Grace Lin, Head of Tax, Cuatrecasas, Shanghai

In March, the Chinese government issued two notices clarifying tariff and tax incentives for the integrated circuit and software industries.

Notice No. 4/2021 implements a new tariff exemption and an import tax incentive for these industries. Notice No. 5/2021 addresses the delegation of administration to different branches of government and detailed implementing issues. These incentives were first announced in Notice No. 8/2020.

The integrated circuit and software industries have been key players in China’s technology reformation and industry transformation for the past 20 years. The tax treatment of these industries has been guided by two fundamental notices issued by China’s State Council every decade (Notice No. 18/2000 and Notice No. 4/2011). To further improve the industrial environment, on July 27, 2020, the State Council issued the Notice on Several Policies to Promote High-Quality Development in the Integrated Circuit and Software Industries in the New Era (Notice No. 8/2020) to guide the industrial development in the decade to come.  

The import tariff and tax policies to be implemented from July 27, 2020 to December 31, 2030, are described in Notice No. 4/2021. The notice was jointly issued by China’s Ministry of Finance, the General Administration of Customs and the State Taxation Administration.

Import tariff exemption

Under Notice No. 4/2021 following activities are exempt from import tariffs:

• Logic circuit and memory manufacturers with an integrated circuit line width below 65 nanometers and integrated circuit manufacturers that adopt featured processes (i.e., analog, digital-analog hybrid, high voltage, radio frequency, power, photoelectric integration, image sensing, micro-electromechanical system, and silicon-on-insulator process) with a line width below 0.25 micrometers import raw materials, consumables, special construction materials for cleanrooms, support systems and spare parts of integrated circuit production equipment (including imported and domestic equipment) for self-use in production and research and development (R&D) that cannot be produced in China or that cannot meet performance demand when produced in China.
• Compound integrated circuit manufacturers with a line width below 0.5 micrometers and advanced integrated circuit packaging and testing companies import raw materials and consumables for self-use in production and R&D that cannot be produced in China or that cannot meet performance demand when produced in China.
• Manufacturers of key raw materials and spare parts for the integrated circuit industry (i.e., target, photoresist, mask, packaging substrate, polishing pad, polishing liquid, 8-inch and above silicon single crystal, and 8-inch and above silicon wafer) import raw materials and consumables for self-use in production and R&D that cannot be produced in China or that cannot meet performance demand when produced in China.
• Manufacturers of photoresist, mask and 8-inch and above silicon wafer for integrated circuits import special construction materials for cleanrooms, support systems and spare parts of integrated circuit production equipment (including imported and domestic equipment) that cannot be produced in China or that cannot meet performance demand when produced in China.
• State-encouraged key integrated circuit design companies, state-encouraged key software companies and companies in the first two situations above (integrated circuit manufacturers and advanced integrated circuit packaging and testing companies) import self-use equipment and technology (including software), components and spare parts with the equipment according to the contract, unless prohibited otherwise.

The Chinese authorities will issue lists of the qualifying companies and tariff-free commodities included in the above situations. Companies that meet the requirements must apply annually to be included in those lists.

Tariffs paid since July 27, 2020, that should have been exempt will be refunded once the lists are issued.

Import VAT installments

Companies undertaking major integrated circuit projects and importing new equipment can pay import VAT in six-year installments after importing the first equipment, unless prohibited otherwise, if they provide a guarantee for the unpaid taxes that Customs acknowledges. In those six years (i.e., every 12 consecutive months), they must pay, respectively, 0%, 20%, 20%, 20%, 20% and 20% of the total import VAT.

The Chinese authorities will issue the lists of qualifying companies and major integrated circuit projects. Again, to be included, companies that meet the requirements must apply annually.

On March 29, five government authorities jointly issued Notice No. 413/2021, providing criteria for companies and projects to benefit from the above tariff and import tax policies and indicating that companies should apply online from March 25 to April 16 every year. This time limit may be extended in practice if needed.

Companies that qualify should contact their local authorities regarding the specific application procedures and documentation requirements.

• Grace Lin is the Head of Tax at Cuatrecasas, Shanghai