On 12 July 2024, China’s Ministry of Finance and the State Taxation Administration announced an expansion of the three-year enterprise income tax incentive for enterprises engaged in energy and water conservation and environmental protection. The incentive—in the form of a tax credit that has been available to certain enterprises for a number of years—is designed to encourage businesses to take steps to conserve resources, and upgrade and renovate equipment used to protect the environment using digital technology and AI.
From 1 January 2024 to 31 December 2027, enterprises that purchase equipment designated by the government to upgrade existing systems for energy and water conservation, environmental protection and work safety may qualify for a tax credit of 10% of the investment in the special purpose equipment provided the investment amount does not exceed 50% of the original book value of the equipment at the time of acquisition. If the tax due by the enterprise is insufficient to absorb the credit, the excess may be carried forward to use in the following five years.
The specialised equipment must be purchased and actually used by the enterprise, it must be included on the government’s list of qualifying equipment and the expenditure must be incurred by the enterprise to acquire digital technology and AI to upgrade the designated equipment. Covered expenditure includes the following:
Although the incentive is elective for enterprises, relevant materials and documentation should be retained for future inspection by the tax authorities, such as the technology development contract or technology service contract registered by the science and technology authorities, and the digital and AI upgrading plan for special equipment.
Gordon Gao
Jack Shen
BDO in China
From 1 January 2024 to 31 December 2027, enterprises that purchase equipment designated by the government to upgrade existing systems for energy and water conservation, environmental protection and work safety may qualify for a tax credit of 10% of the investment in the special purpose equipment provided the investment amount does not exceed 50% of the original book value of the equipment at the time of acquisition. If the tax due by the enterprise is insufficient to absorb the credit, the excess may be carried forward to use in the following five years.
The specialised equipment must be purchased and actually used by the enterprise, it must be included on the government’s list of qualifying equipment and the expenditure must be incurred by the enterprise to acquire digital technology and AI to upgrade the designated equipment. Covered expenditure includes the following:
- Data collection technology:
- Data transmission and storage;
- Data analysis;
- Digital controls; and
- Digital security and protection.
BDO insights
Strict accounting requirements must be met for enterprises to qualify for the tax credit. Enterprises wishing to benefit from the credit should consider separate accounting for the digital technology and AI used to upgrade relevant equipment, and accurately and reasonably track all expenses or involve a third party to review whether the equipment and expenses are appropriately booked from Chinese accounting and tax perspectives.Although the incentive is elective for enterprises, relevant materials and documentation should be retained for future inspection by the tax authorities, such as the technology development contract or technology service contract registered by the science and technology authorities, and the digital and AI upgrading plan for special equipment.
Gordon Gao
Jack Shen
BDO in China