(Yicai) Nov. 12 -- China may raise the additional research and development tax deduction rate for high-tech and small technology firms to as much as 200 percent under the 15th Five-Year Plan, according to tax experts.

A higher R&D deduction rate will motivate technology companies to invest more in innovation and strengthen their competitiveness, said the finance director of a large smartphone maker. The company welcomes this move and are closely following the detailed policy rollout, the person told Yicai.

The Central Committee of the Communist Party of China recently revealed new recommendations for the 15th Five-Year Plan (2026-2030), calling for greater support for high-tech enterprises and technology-based small and medium-sized by raising their R&D deduction rates.

The additional R&D expense deduction is a preferential enterprise income tax policy that allows firms to deduct an extra proportion of R&D spending from taxable income, beyond standard deductions. When a 100 percent rate applies, an enterprise investing CNY100 (USD14) in R&D can deduct CNY200 when paying income tax.

China already raised the rate for companies in the integrated circuit and industrial mother machine sectors to 120 percent from 2023 to 2027 to boost their high-quality development.

High-tech enterprises and technology-based SMEs are the key players in China’s innovation system, but they often face large R&D costs and funding shortages, said Chen Pinglu, professor at the School of Management at Huazhong University of Science and Technology. Raising the deduction rate can directly reduce their tax burden, grant policy benefits, and free up more resources for R&D and innovation.

Tian Zhiwei, executive director of the Institute of Public Policy and Governance at Shanghai University of Finance and Economics, predicted that the deduction rate for such enterprises may rise to 120 percent in the near term, which will “undoubtedly boost their R&D enthusiasm.”

Globally, R&D tax incentives are more generous, Chen noted. In some US states, additional R&D deductions exceed 150 percent, while Lithuania offers up to 300 percent. China, he said, should align itself with high international standards to enhance its global competitiveness.

During the 15th Five-Year Plan, the rate is expected to rise gradually, Chen added. The general rate for all companies may increase from 100 percent to between 120 percent and 150 percent, while the rate for high-tech firms and technology-based SMEs could reach between 150 percent and 200 percent.

China may also consider introducing an R&D tax credit system, allowing part of eligible R&D expenses to directly offset enterprise income tax rather than adjusting with the tax rate, said Tian Binbin, vice dean of the School of Public Finance and Taxation at Zhongnan University of Economics and Law.

Last year, 615,000 companies claimed a total of CNY3.32 trillion (USD466.3 billion) in R&D deductions from taxable income, up 17 percent and 26 percent, respectively, from 2021, according to data from the State Taxation Administration.

Editor: Emmi Laine