1. Concept of technical development fees

Technical development fees used to offset the EFI's taxable income are those expenses incurred by the enterprises in a tax year for research and development of new products, technologies and processes, including expenses on design of new products, formulation of new protocols, equipment test & adjustment, trial-production for raw materials and semi-products; reference book and material fees; intermediate experiment fee not listed into the state plan; staff members wages of the research institutions; depreciation for research equipment; other fees related to trial-production of new products and technological researches; and expenses arising from the researches and trial productions by other entities under the authorization of the EFI for the sake of the EFI's project. Fees excluded are the payments made by the enterprise to purchase the technology or utility right of the technology from other entities, or those funds directly appropriated by the higher authority of the Chinese partner in an equity joint venture or by foreign investors.

2. Proportion of technical development fees allowed in the offsetting

Since Jan. 1st, 2000, EFIs, whose technical development fee arising in China has increased by 10% or more than that for the previous year, shall re-offset 50% of the current technical development fee actually paid against the taxable income for the same year, upon examination and approval by the taxation authorities; if the 50% of the technical development fee actually paid is higher than the taxable income for the year, the enterprises may be permitted to offset the portion which is not exceeding their taxable income and the portion in excess shall not be allowed to offset in this year or for the succeeding years. The above-mentioned provisions are not applicable where enterprises have no taxable income for this year after they have made up the loss for the previous year under the Tax Laws. The provisions shall apply where technical development fees are incurred to the establishments or places set up in China by foreign enterprises to engage in productions or business operations.

3. Management of technical development fees

To be engaged in technical development, EFIs shall set up a project first, prepare the project plan and budgets, and maintain a separate account for managing the technical development fees entered as administrative expenses. The tax authority should verify the technical development fees on an annual basis: check whether a separate account is maintained and the fund earmarked for technical development is used solely for the purpose; assess the actual payment in technical development according to the scope and standard specified by the applicable circular. In the case of any expenses not recognized by the competent tax authority, or any false statement or filing by the enterprise, taxable income should be adjusted in time. For any fraudulent claim for pre-tax deductions, penalties shall be imposed according to the Law of the People's Republic of China Concerning Tax Administration and Tax Collection.