The Made in China 2025 strategic plan to develop the national chip industry has stimulated the establishment of tens of thousands of fabless semiconductor developers in the People's Republic in just a few years. However, around 10,000 of such companies have not survived, despite help from federal and local governments. Apparently, China is now prepping another major incentive campaign for semiconductor companies, one that will provide sizable compensation for R&D expenses.
Central to this policy is an enhanced deduction scheme for semiconductor R&D expenses. Companies that channel funds into R&D activities and generate tangible assets from these expenditures will be rewarded with generous pre-tax deductions. Specifically, they can anticipate a deduction of 120% of the actual amount spent between 2023 and 2027. Conversely, for companies whose R&D investments culminate in the creation of intangible assets, there's a provision to amortize these assets pre-tax at a substantial rate of 220% of the asset's cost over the same five-year period.
These benefits will be provided for a wide range of semiconductor companies, including actual chipmakers; fabless chip designers; IC packaging and testing companies; and those involved in the production of materials used in chipmaking. In addition, companies that develop and build wafer fab equipment will also get the deductions.
While these deductions significantly reduce the tax burden on companies, making R&D activities more financially appealing, they don't mean the government is directly paying companies for their R&D activities. Instead, the government is simply forgoing potential tax revenue to incentivize companies to invest more in R&D.
For example, if a company spends $100 on R&D activities that result in tangible assets, they can deduct $120 (120% of $100) from their taxable income. This means they get a tax break on an amount greater than what they actually spent, reducing their taxable income and, consequently, their tax liability.
If the R&D expenses lead to the creation of intangible assets, the company can amortize (spread out) the cost of that asset over time. In this case, if the intangible asset costs $100, they can deduct $220 (220% of $100) from their taxable income over the specified period.
The companies’ eligibility for the aforementioned tax benefits is determined by their alignment with national encouragement criteria and specific regulatory announcements. Meanwhile, the tax preferential policies are structured in a way that qualifying enterprises are listed annually, with a verification mechanism for those not on the list.
