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7. What are the regulations regarding foreign investment in the establishment of research and development centers? What preferential policies are offered?
To encourage foreign investment to establish R&D centers in China, the Ministry of Foreign Trade and Economic Cooperation issued the Circular Concerning Issues Related to Foreign Investment in the Establishment of Research and Development Centers in 2000. It includes the form and business scope of a foreign-invested R&D center, conditions for establishment, the procedure and relevant preferential policies.

1). Form and Business Scope of a Foreign-invested R&D Center

a. A foreign-invested R&D center may take the form of a Sino-foreign equity or cooperative joint venture or wholly foreign-owned enterprise established according to law by foreign investors (including investment companies established with foreign investment), or an independent department or branch within a foreign-invested enterprise.

b. An R&D center is to serve as an institution engaged in the R&D and experimental development (including intermediate experiments that serve R&D activities) in natural sciences and related scientific and technological fields. The contents of R&D may be basic research, product application research, high-tech research and research for social benefits. The R&D projects shall not include those listed under the prohibited category in the Industrial Catalogue for Foreign Investment, nor can the center conduct any trade of technological results that are not generated by the R&D center itself or manufacturing activities other than intermediate experiments. An R&D center may transfer its own R&D results and commission R&D projects to, or undertake cooperative projects with domestic scientific research academies and institutes. A training center cannot be classified as an R&D center.

2). Conditions for the Establishment of a Foreign-invested R&D Center

a. There are clear-defined R&D fields and specific R&D projects, a permanent location, instruments and equipment needed in scientific research and other conditions necessary for scientific research. The total investment of the R&D center devoted to research and development shall not be lower than US$2 million.

b. An R&D center shall be staffed with full-time managerial and R&D personnel, of whom those possessing the bachelor's degree or above and directly engaged in R&D activities, as a percentage of the total staff, shall not be lower than 80 percent.

3). Procedures for the Establishment of a Foreign-invested R&D Center

a. An R&D center established by foreign investors in the form of an equity joint venture, a cooperative joint venture or a wholly foreign-owned enterprise is subject to the examination and approval of the examination and ratification authorities at the provincial level.

b. An R&D center established under a foreign-invested enterprise (including an investment company)

(1) To establish an R&D branch or an independent R&D department, the examination and approval shall be conducted by the examination and ratification authorities for the foreign-invested enterprise within its power; however, should the enterprise be a restricted category A enterprise below the ceiling, the examination and approval shall, without exception, be conducted by the examination and ratification authorities at the provincial level.

(2) If an existing foreign-invested enterprise whose scope of business includes "research" or "development" establishes an independent R&D department, it should submit relevant documents on the independent R&D department to the previous examination and ratification authorities. If the enterprise's scope of business does not include the above-mentioned operations, its contract and articles of corporation shall be revised and submitted to the previous examination and ratification authorities for approval.

4). The application submitted to the examination and ratification authorities shall include the following:

a. The direction, field, major task and implementation plan of R&D;

b. Information on the location, personnel and relevant conditions for scientific research;

c. The source, specific purpose and amount of the funds needed for R&D and the corresponding financial budget report;

d. The list of self-use equipment imported within the scope of the total investment or financed with equity funds, and supporting technology, parts, spares and research samples and chemical agents used in the process of R&D; and

e. Notes on the advanced nature of the R&D contents and the owner of the R&D results.

5). Other relevant provisions:

a. The expenditure needed by the R&D center in the form of an independent department or a branch shall be separately listed on the annual financial budget of the enterprise that has set up the center, with separate accounts to be kept.

b. For a foreign-invested enterprise that falls in the restricted category A, its investment in an R&D center established in the form of an independent department or a branch shall not exceed 50 percent of the enterprise's total investment.

c. An R&D center shall, on an annual basis and prior to March 31, submit to the examination and ratification authorities information on its R&D progress and business operations in the preceding year.

6). Preferential Policies for Foreign-invested R&D Centers

a. Self-use equipment and matching technology, parts and spares (excluding the commodities specified in the Catalogue of No-Tax-Exemption Import Commodities for Foreign-invested Enterprises, vessels, aircraft, special kinds of vehicles and construction machinery) imported within the total amount of investment shall be exempted from the import tariff' and the import-stage taxes, if they are used only by laboratories that do not reach a production scale or fall into the scope of intermediate experiment.

b. For technical renovation by way of using their own funds, imports of self-use equipment and matching technology, parts and spares within the previously approved scope of business that meet the conditions specified in the preceding paragraph shall be exempted from the import tariff and import-stage taxes.

c. Proceeds obtained from transfer of technology developed as a result of their own research and development shall be exempted from the business tax.

d. If the expenditure for technology development increases by over 10 percent (including 10 percent), 50 percent of the actual amount of technology development expenditure can be used to deduct the current year's amount of taxable income with the approval of the taxation authorities.

e. Other incentives provided for by the state.

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