In order to encourage mass entrepreneurship and innovation, and promote economic upgrading and development, enterprises in line with the provisions of the Administrative Measures for the Recognition of High-tech Enterprises are able to enjoy the enterprise income tax rate of 15% type of concessions, and at the same time, enjoy the extension of the number of years of loss carry-forward and other tax incentives. In recent years, a number of high-tech enterprise certification bodies to strengthen the supervision and management of high-tech enterprise qualification, has issued a number of cancellation of high-tech enterprise qualification announcements, enterprises face the risk of paying back taxes and late fees or even tax evasion. In this paper, from the identification requirements of high-tech enterprises, we list the common cases of high-tech qualification being canceled in practice, in order to suggest the risk for readers' reference.

I. Many places issued announcements in July to cancel the high-tech qualification of enterprises

The announcement of the Ministry of Science and Technology Torch Center's High-tech Enterprise Recognition and Management Network shows that in July 2023, Qingdao, Shanghai and Jiangsu Province issued announcements on the cancellation of enterprises' high-tech qualifications in a number of places. Among them, 23 enterprises in Qingdao were canceled as high-tech enterprises in 2023, 45 enterprises in Shanghai were canceled as high-tech enterprises covering the period from 2019 to 2022, and 21 enterprises in Jiangsu Province were canceled as high-tech enterprises in 2021 and 2022. Taking the announcement issued by the Shanghai High-tech Enterprise Recognition Steering Group as an example, the reasons for enterprises to be disqualified from high-tech qualification mainly include high-tech revenue ratio not meeting the standard, scientific and technological personnel ratio not meeting the standard, and research and development expenses ratio not meeting the standard.

It is worth noting that the Administrative Measures for the Recognition of High-tech Enterprises clearly stipulates that, if the recognized organization confirms that it does not meet the conditions for the recognition of high-tech, the recognized organization shall cancel its qualification of high-tech enterprise and notify the tax authorities to recover the tax benefits it has enjoyed since the year in which it does not meet the conditions for recognition. The announcements of some regions also directly state the recovery of tax incentives enjoyed since the year of the canceled high-tech qualification enterprises do not meet the qualification conditions. For enterprises whose high-tech qualification has been canceled, they will face the risk of paying back taxes and late fees, or even being fined, and will incur even greater economic losses if previous years are involved. The following section will further analyze the application conditions and the tax administration system of the high-tech enterprise qualification and suggest the potential risks to the enterprises.

II. Recognition conditions of high-tech enterprises and the cancellation of high-tech qualifications

(I) Eight conditions must be satisfied before a high-tech enterprise can be recognized as a high-tech enterprise.

The Administrative Measures for the Recognition of High-tech Enterprises and the Administrative Guidelines for the Recognition of High-tech Enterprises (hereinafter referred to as the "Working Guidelines") are the main documents that stipulate the conditions and management procedures for the recognition of high-tech enterprises. Article 11 of the Administrative Measures for the Recognition of High-tech Enterprises stipulates that a high-tech enterprise shall satisfy eight conditions at the same time, and the enterprises meeting the conditions shall adopt the management procedures of self-application, expert assessment and examination and recognition. For qualified enterprises, the management procedure of self-application, expert evaluation and review is adopted. The specific conditions are as follows:

(1)The enterprise shall be registered and established for more than one year when applying for recognition.

(2)The enterprise obtains the ownership of intellectual property rights that play a core supporting role in technology for its main products (services) through independent research and development, assignment, donation, merger and acquisition.

(3)The technology that plays a core supporting role for the enterprise's main products (services) belongs to the scope stipulated in the "High and New Technology Fields with National Key Support".

(4)The ratio of scientific and technological personnel engaged in R&D and related technological innovation activities of the enterprise to the total number of employees of the enterprise for the year shall not be less than 10%.

(5)The enterprise in the last three fiscal years (the actual operating period of less than three years according to the actual operating time, the same below) of the total research and development costs accounted for the same period of the proportion of total sales revenue in line with the following requirements:

For enterprises with sales revenue of less than 50 million yuan (inclusive) in the last 1 year, the ratio shall not be less than 5%.

For enterprises with sales revenue of 50 million yuan to 200 million yuan (inclusive) in the most recent 1 year, the ratio is not less than 4%.

For enterprises with sales revenue of 200 million yuan or more in the most recent 1 year, the percentage shall not be less than 3%.

Among them, the proportion of the total research and development expenses incurred by the enterprise in China to the total of all research and development expenses shall not be less than 60%.

(6)The proportion of revenue from high-tech products (services) in the last 1 year to the total revenue of the enterprise in the same period shall not be less than 60%.

(7)The evaluation of enterprise innovation ability shall meet the corresponding requirements.

Enterprise innovation capability is mainly evaluated from four indicators, such as intellectual property rights, scientific and technological achievements transformation ability, research and development organization and management level, and enterprise growth.

(8)No major safety, major quality accidents or serious environmental violations occurred within 1 year before the enterprise applied for recognition.

(II) Three types of cases of canceling the high-tech qualification

(1)The organization directly cancel the enterprise's high-tech qualification

Article 19 of the Administrative Measures for the Recognition of High-tech Enterprises stipulates that if a recognized high-tech enterprise has one of the following behaviors, its high-tech enterprise qualification shall be canceled by the certification authority: (1) there is serious falsification in the process of applying for the recognition; (2) there is a major safety, major quality accidents, or there is a serious environmental violation; (3) it fails to report on a regular basis on the major changes in the conditions of the certification 

(2)The relevant departments shall request the accreditation organization to review and cancel the accreditation.

Article 16 of the Administrative Measures for the Recognition of High-tech Enterprises stipulates that for recognized high-tech enterprises, if the relevant departments find that they do not meet the conditions for recognition in the process of daily management, they shall submit them to the recognition authority for review. If the review confirms that it does not meet the conditions of the certification, the certification body shall cancel its qualification as a high-tech enterprise and notify the tax authorities to recover the tax concessions it has been enjoying since the year in which it does not meet the conditions of the certification.

(3)Self-reported name change and major changes are canceled by the accreditation organization after review.

Article 17 of the Administrative Measures for the Recognition of High-tech Enterprises stipulates that a high-tech enterprise that has undergone a name change or major changes related to the recognition conditions (such as separation, merger, reorganization and changes in business operations) shall report to the recognition agency within three months. If the accreditation organization meets the accreditation conditions, the qualification of high-tech enterprise shall remain unchanged, and if the enterprise is renamed, the accreditation certificate shall be reissued with the same number and validity period; if the enterprise fails to meet the accreditation conditions, the qualification of high-tech enterprise shall be canceled since the year of the renaming or change of conditions.

III. Commonly situation of canceling high-tech certification in practice

(I) Revenue share of high-tech products does not meet the standard

Case: Listed company's high and new qualification due to high income from foreign investment

On June 5, 2023, a listed company issued the "Announcement on the Adjustment of the Company's 2022 Enterprise Income Tax Rate due to the Tax Preferential Policies Not Recognized by the Tax Department", stating that, because the proportion of the company's revenue from high-tech products in the year of 2022 as recognized by the tax department was not up to 60% of its total revenue during the same period, the tax bureau adjusted the company's 2022 enterprise income tax rate to 25%, and the amount of enterprise income tax payable in 2022 was 43,000,000 yuan, which was calculated as follows The amount of enterprise income tax payable for 2022 is RMB43,243,587.57, which is an increase of RMB15,218,214.65 from the amount of enterprise income tax payable in the Company's Annual Report for 2022. Up to now, the Company has completed the 2022 income tax settlement and paid the full amount of enterprise income tax of RMB43,243,587.57.

According to the information, the Company obtained the Certificate of High and New Technology Enterprise in December 2020, which is valid for three years, i.e. the Company is entitled to a preferential enterprise income tax rate of 15% in 2020, 2021 and 2022. in 2022, the Company transferred 31% equity interest in the former controlling subsidiary, Company A, resulting in the Company generating an investment income of RMB30,221,730,000, and the tax authorities have made a full payment of RMB43,243,587.57 in 2022. Accordingly, the tax authorities determined that the proportion of the Company's revenue from high-tech products to the total revenue for the same period did not reach 60% during the FY2022 settlement process, adjusted the Company's applicable EIT rate to 25% and recalculated the amount of EIT payable by the Company for FY2022. The listed enterprise has objections to this matter and is still communicating and negotiating with the competent tax authorities on this matter.

The Administrative Measures for the Recognition of High-tech Enterprises stipulates that one of the criteria for the recognition of a high-tech enterprise is that the revenue from high-tech products (services) in the recent year accounts for not less than 60% of the total revenue of the enterprise in the same period. The total income refers to the total income minus the non-taxable income. Article 6 of the Enterprise Income Tax Law stipulates that the income obtained by the enterprise from various sources in monetary and non-monetary forms shall be the total income, which includes the income from transfer of property, dividends, bonuses and other equity investment income. Therefore, the income obtained by the enterprise from the transfer of equity belongs to the income from the transfer of property and should be included in the total income, thus affecting the calculation of the percentage of high-tech income.

(II) R&D expenses and ratio of scientific and technological personnel do not meet the requirements

Because the ratio of R&D expenses and scientific and technological personnel does not meet the requirements and the high-tech qualification is canceled is the enterprise high-tech qualification management and maintenance of the hardest-hit area, the "Administrative Measures for the Recognition of High and New Technology Enterprises" and the "Work Guidelines" clearly stipulates the specific requirements of the ratio of R&D expenses and the ratio of scientific and technological personnel:

(1) The ratio of R&D expenses of an enterprise is the ratio of the total R&D expenses of the enterprise in the last three fiscal years to the total sales revenue in the same period.

(2)The ratio of enterprise scientific and technological personnel is the ratio of the number of enterprise scientific and technological personnel to the total number of employees.

Scientific and technological personnel: The scientific and technological personnel of an enterprise refers to those who are directly engaged in research and development and related technological innovation activities, as well as those who specialize in the management of the above activities and the provision of direct technical services, with a cumulative total of 183 or more days of actual working time, including on-the-job, part-time and temporarily-employed personnel.

Total number of employees: The total number of employees of an enterprise includes the enterprise's active, part-time and temporarily employed personnel. Active employees can be identified by whether the enterprise has signed labor contracts or paid social insurance premiums; part-time and temporarily employed personnel must have worked in the enterprise for more than 183 days in the year.

Statistical method: The total number of employees and scientific and technological personnel of the enterprise in the year are calculated according to the monthly average of the year.

Monthly average = (number at the beginning of the month + number at the end of the month) ÷ 2

Monthly average for the whole year = sum of monthly average for the whole year ÷ 12

(III) Serious falsification in the process of applying for recognition

The first paragraph of Article 19 of the Administrative Measures for the Recognition of High and New Technology Enterprises stipulates that if there is serious falsification in the process of applying for recognition, the qualification of high-tech enterprises shall be canceled by the recognition organization.

Sichuan High Enterprise Recognition [2019] No. 5 "on the cancellation of Company A high-tech enterprise qualification notice" reflects this problem more specifically: the Sichuan Provincial Department of Science and Technology to receive real-name reports, by the Department of Science and Technology, the Tax Bureau and other departments of the staff and financial experts on the site of the investigation of the Company A, through the access to information, inquiries to learn more about the investigation of evidence, expert testimony, and other ways of verifying the problems reflected in the whistleblower, and found that the Company in the process of high-tech identification, in the R & D expenses, R & D personnel, there are false and fraudulent cases, cancel its high-tech qualification since the 2017 year.

In addition, there are also some enterprises that have not filled in the annual report of high-tech enterprises for a cumulative period of two years due to bankruptcy, closure, cancellation, abandonment of enterprises, and the qualification of high-tech enterprises has been canceled, and there are also enterprises that are no longer in compliance with the qualification due to the occurrence of a name change or major changes related to the qualification conditions of the qualification.

IV. Risks and Responses of High-tech Enterprises

(I) High-tech qualification is canceled, enterprises face severe tax-related risks

(1)Risk of paying back taxes and late payment fees

According to Article 43 of the Implementation Rules of the Tax Collection and Management Law, if an enterprise's high-tech qualification expires and it is not recognized as a high-tech enterprise, it shall resume tax payment from the date of expiration. The Administrative Measures for the Recognition of High-tech Enterprises clearly stipulates that for enterprises whose high-tech qualification has been canceled, the tax authorities will recover the tax concessions they have enjoyed since the year in which they do not meet the recognition conditions. Meanwhile, according to the provisions of the Law on Administration of Tax Collection, if the taxpayer fails to pay the tax according to the specified period, the tax authorities, in addition to ordering the payment of the tax by the deadline, will add a late fee of five ten-thousandths of one percent of the tax from the date of the late payment of the tax on a daily basis.

(2)Being recognized as tax evasion due to falsification of declaration materials

Enterprises that falsify declaration materials subjectively (e.g., falsely listing R&D expenditures by increasing R&D personnel, falsifying intellectual property rights, falsifying R&D personnel, etc.) may be recognized as "making false tax declarations" as stipulated in Article 63 of the Law on Administration of Tax Collection, and thus characterized as tax evasion, and the taxpayer shall be punished for tax evasion in accordance with the provisions of the Law on Administration of Tax Collection. In accordance with the provisions of the Tax Collection and Management Law, if a taxpayer evades tax, the tax authorities shall recover the unpaid or underpaid tax, late payment fees and impose a fine of not less than 50% and not more than 50% and not more than 5 times of the unpaid or underpaid tax. If the enterprise is unable to make up all the taxes and late payment fees, it will be transferred to the public security for the crime of tax evasion, and the persons involved in the case will face the risk of criminal liability.

(II) How should high-tech enterprises prevent risks?

(1)Enterprises should fully understand the high-tech qualification policy

Enterprises should fully understand the relevant provisions of the Administrative Measures for the Recognition of High-tech Enterprises, familiarize themselves with the specific requirements of the eight recognition conditions, and at the same time understand other circumstances that may affect the high-tech qualification of the enterprise, such as whether there is a change of name or a significant change in the recognition conditions (e.g., separation, merger, reorganization, and change of business operations, etc.).

(2)Enterprises should check the indicators dynamically

The identification and maintenance of high-tech status is a coherent work, and enterprises should pay dynamic attention to whether the relevant indexes meet the identification conditions and do regularized tax risk control. After obtaining the high-tech qualification, taxpayers should, within the validity period of 3 years, regularly carry out relevant, continuous and comprehensive assessment on the indicators of high-tech enterprise identification such as the acquisition of intellectual property rights, the quantity and quality of R&D projects, the percentage of high-tech revenue, the percentage of R&D expenses, the percentage of scientific and technological personnel, and so on.