In order to promote the high-quality development of the integrated circuit (“IC”) industry, the Ministry of Finance and the State Taxation Administration issued a notice on the value-added tax additional deduction policy for IC enterprises. To provide IC customers with tax support, Kaizen has summarized the relevant policies on value-added tax deduction for IC design enterprises for customers' reference.

1. Additional deduction for IC enterprises
   
   From 1 January 2023 to 31 December 2027, integrated circuit enterprises engaging in IC design, manufacturing, packing and testing, equipment, materials would be eligible for an additional 15% input VAT credit deductible from the current input VAT payable.
   
   
2. Conditions to be met by IC design enterprises eligible for VAT additional deduction
   
   To be eligible for the VAT additional deduction, integrated circuit design enterprises must meet the following conditions at the same time:
   
   

   (1)	Enterprises legally established in China (excluding Hong Kong, Macao and Taiwan), engaged in integrated circuit design, electronic design automation (EDA) tool development or intellectual property (IP) nuclear design, and with independent legal personality;
   (2)	The enterprise should be a general VAT taxpayer;
   (3)	In the previous year of applying for preferential policies, the monthly average number of research and development personnel with labor contract relations or labor dispatch and employment relations in the enterprise accounted for no less than 40% of the monthly average total number of employees in the enterprise;
   (4)	The enterprise owns core key technologies and intellectual property rights, and carries out business activities on this basis, and the proportion of total research and development expenses to the total sales (operating) income (the sum of main business income and other business income) of the enterprise in the previous year of applying for preferential policies shall not be less than 6%;
   (5)	In the previous year of applying for preferential policies, the sales (operating) income of integrated circuit design (including EDA tools, IP and design services) shall not be less than 60% of the total revenue of the enterprise, of which the sales (operating) income of independent design shall not be less than 50% of the total revenue of the enterprise, and the total revenue of the enterprise shall not be less than (including) 30 million yuan;
   (6)	No major safety, major quality accidents or serious environmental violations occurred in the previous year of applying for preferential policies.

   
   
3. Issues to pay attention when enjoy the VAT deduction policy
   
   An IC design enterprise shall calculate the additional deduction for the current period according to 15% of the input VAT that can be deducted for the current period. The input VAT corresponding to external purchase of chips, and that cannot be deducted from the output VAT according to the current regulations, shall not be eligible for the additional deduction; Where the additional deduction of input VAT has already been deducted and the amount of the deduction is transferred out according to the provisions, the amount of the deduction shall be adjusted and increased accordingly in the period when the input VAT is transferred out.
   
   The additional deductions that can be deducted but are not deducted by an IC design enterprise can be deducted in the period when the additional deductions policy is determined to apply.
   
   IC design enterprises exporting goods and services or conducting cross-border taxable behaviour are not applicable to the additional deduction policy, its corresponding input VAT shall not be eligible for the additional deduction.
   
   If an IC design enterprise concurrently engages in goods and services export, conducting cross-border taxable activities and cannot divide the input VAT not eligible for additional deduction, it shall calculate the input VAT not eligible for additional deduction according to the following formula:
   
   Input VAT not eligible for additional deduction = all input VAT that cannot be divided in the current period * Sales of goods and services export and cross-border taxable activities in the current period/all sales in the current period
   

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