AI companies are a priority category of technological innovation for the State and may claim a range of tax reliefs. Many, however, forgo reductions running into millions of renminbi because the relevant policies are not understood.
Super-deduction of R&D expenses
General enterprises (universal policy)
Under Announcement No. 7 of 2023 of the Ministry of Finance and the State Taxation Administration, the super-deduction of R&D expenses now applies uniformly across all industries:
| Type | Deduction rate | Effect |
|---|---|---|
| Expensed R&D expenditure | 100% additional deduction | RMB 1 million incurred is deducted as RMB 2 million |
| Capitalised R&D expenditure | 200% amortisation | An intangible asset is amortised at 200% of its cost |
Period of application: long-term.
Additional deduction for priority industries (integrated circuits and industrial mother machines)
Under Announcement No. 44 of 2023 of the Ministry of Finance and three other departments:
| Type | Deduction rate | Period |
|---|---|---|
| Expensed expenditure | 120% additional deduction (220% in total) | 1 January 2023 to 31 December 2027 |
| Capitalised expenditure | 220% amortisation | As above |
Cap on other related expenses
Other related expenses directly connected with R&D activity may not exceed 10% of the total R&D expenses eligible for the additional deduction.
Categories of eligible expenditure
| Category | Eligible |
|---|---|
| Personnel costs | Yes |
| Direct input costs | Yes |
| Depreciation | Yes |
| Amortisation of intangible assets | Yes |
| Design costs | Yes |
| Outsourced R&D | Yes (80% counted) |
| Other related expenses | Yes (up to 10% of the total) |
High-tech enterprise recognition
Conditions
| Condition | Requirement |
|---|---|
| Period since incorporation | More than one year |
| Intellectual property | Ownership of the core technology |
| Field of technology | Within the Catalogue of High-Tech Fields Supported by the State |
| Proportion of R&D personnel | Not less than 10% |
| Proportion of R&D expenses | Revenue of RMB 50 million or less: not less than 5% |
| RMB 50 million to RMB 200 million: not less than 4% | |
| Above RMB 200 million: not less than 3% | |
| Revenue from high-tech products | Not less than 60% of total revenue |
| Safety and environment | No material safety incident or environmental violation within one year |
Tax benefits of high-tech status
| Tax | Benefit |
|---|---|
| Enterprise income tax | 15% (25% for ordinary enterprises) |
| Equity awards | Deferred taxation where the conditions are met |
Points for AI companies
- The intellectual property must have been independently developed, not merely purchased.
- AI algorithm patents and software copyrights may both serve as core intellectual property.
- Revenue from high-tech products or services must exceed 60% of total revenue.
- R&D expenses must be accounted for in separate books.
Relief for technology contracts
VAT exemption
Under Announcement No. 10 of 2026 of the Ministry of Finance and the State Taxation Administration, from 1 January 2026 to 31 December 2027:
| Type of contract | VAT |
|---|---|
| Technology transfer contract | Exempt |
| Technology development contract | Exempt |
| Related technical consultancy and services | Exempt, where connected with a transfer or development |
Income tax relief
| Type | Benefit |
|---|---|
| Income from technology transfer | Exempt up to RMB 5 million; the excess taxed at half rate |
| Technology development contract | Relief available after recognition |
Procedure
- Enter into a written technology transfer or development contract.
- Apply for recognition to the provincial science and technology or industry and information technology authority.
- Claim the relief on production of the contract and the recognition certificate.
Cross-border tax risks for AI companies
Transfer pricing
Related-party transactions of an AI company — licensing of intangibles, allocation of service costs, lending and borrowing — must follow the arm’s length principle. Under the BEPS project, three tiers of documentation may be required:
| Document | Applicability |
|---|---|
| Master file | Consolidated group revenue above the threshold |
| Local file | Related-party transaction value above the threshold |
| Country-by-country report | Group revenue above the threshold |
Permanent establishment
Where an AI company supplies services cross-border through SaaS, API access or model licensing, a permanent establishment may be found, giving rise to a tax liability in the host jurisdiction.
Characterisation of income
Tax authorities apply substance over form:
- Does the customer obtain control over the model, the right to modify it, or the right to sub-licence it?
- If so, the arrangement may be characterised as a technology transfer, exempt from VAT.
- If not, it may be characterised as a technical service, generally subject to VAT at 6%.
Global minimum tax
The OECD/G20 two-pillar solution sets a 15% global minimum tax. From January 2026 the OECD has implemented the parallel package. Larger AI companies should assess the impact.
Tax compliance checklist for an AI company
| Item | Requirement |
|---|---|
| Separate R&D accounts | R&D must be accounted for separately and not commingled with operating expenses |
| Time records | Working hours spent by R&D personnel on R&D activity must be recorded |
| Project approval documents | Each R&D project requires an approval report |
| Maintenance of high-tech status | Re-recognition every three years |
| Technology contract recognition | Recognition by the science and technology authority before relief is claimed |
| Pricing of cross-border transactions | Related-party transactions must follow the arm’s length principle |
| Equity incentive filing | Unlisted companies must file with the tax authority |
Frequently asked questions
Q: Do AI training costs count as R&D expenses? A: Yes. Purchased training data, annotation personnel costs, computing power rental and direct inputs to model training may all be included, provided there are project approval documents and separate accounts.
Q: We are still a small company. Should we apply for high-tech status? A: Where core intellectual property and R&D expenditure already exist, early application is advisable. High-tech status carries a 15% enterprise income tax rate against the standard 25%, which for a profitable company represents a substantial saving.
Q: Can the cost of outsourced model training be included in the additional deduction? A: Yes, but at 80% of the actual cost. A technology development contract should be signed with the service provider and an invoice obtained.
This article is prepared on the basis of the relevant announcements of the Ministry of Finance and the State Taxation Administration and the Measures for the Administration of the Recognition of High-Tech Enterprises. For assistance with tax compliance for an AI company, please contact Geason Law Offices.