CHINA Trends and Developments Contributed by: Min Zhu, Ya-ling Gon, Yang Gu, Chai Lu, Ying Li and Shiye Yuan, Han Kun Law Offices
Input VAT refunds In terms of VAT treatment, a major incentive is the input VAT refund mechanism, under which small-scale or manufacturing life sciences com- panies can have their qualified accumulated input VAT refunded. This is particularly benefi- cial for life sciences companies that incur signifi- cant input VAT out of payments due to R&D or licence activities during their early stages when they have no chance to book revenue. From a transactional perspective, it is also important to have a proper understanding of the relevant tax implications. For example, for license-in deals, apart from the potential input VAT refunds, one of the key tax considerations is the identification of a permanent establishment for overseas licensors that plan to assign per- sonnel to work in the PRC for the licence pro- ject. The entire revenue package of the licensor may be subject to a corporate income tax rate of 25% if it is deemed to have set up a permanent establishment in the PRC.
Tax incentives extended Since 2023, the economic environment in the PRC has proven to be mixed. In order to promote business development, the government and tax authorities have extended many tax incentives including those designed for small and medium- sized companies. These incentives are not only applicable to life sciences companies but reduce the tax burden for start-up companies signifi- cantly as well. License-out tax matters In 2024, we observed more PRC-based life sci- ences companies license-out IP to overseas companies. Proper design of transaction struc- tures is needed to avoid triggering a significant tax burden for these PRC-based licensors, espe- cially with respect to foreign withholding taxes.
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