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27 July 2018 China grants additional five years to loss carryforward period for certain technology enterprises China's Ministry of Finance and the State Administration of Taxation (the SAT) jointly released Caishui [2018] No. 76 (Circular 76)1 extending the current 5-year loss carryforward period to 10 years for High-and-New Technology Enterprises (HNTEs) and Technology-based Small and Medium-sized Enterprises (TSMEs). Circular 76 is retroactively effective to 1 January 2018. Under the Corporate Income Tax Law, tax losses can be carried forward for five years. Circular 76 extends the current 5-year loss carryforward period to 10 years for an enterprise identified as an HNTE2 or TSME3 in the current year, if the entity has tax losses incurred within the 5 preceding years. Circular 76 benefits foreign-invested enterprises that make substantial investments in technologies developments, as these enterprises typically sustain large losses in the initial investment periods. Allowing a longer loss carryforward period enables the enterprises to utilize more losses against future profits. However, there are some uncertainties regarding the implementation of Circular 76, such as whether a change/cessation of HNTE status for the enterprise affects the utilization of tax losses in the years after the status change, requiring clarification by the SAT. 2 An HNTE should be recognized according to the provisions in Guokefahuo [2016] No. 32 ("Circular 32", i.e., Notice regarding the revised "Administrative Measures on HNTE Recognition"). 3 A TSME should obtain a registration number for TSME according to Guokefazheng [2017] No. 115 ("Circular 115", i.e., Notice regarding the "Measures on the Evaluation of TSMEs").
Document ID: 2018-5912 |
