China has introduced a new tax incentive aimed at encouraging companies to invest in digital and smart upgrades of specific equipment. Under this initiative, companies that upgrade equipment for environmental protection and safe production can deduct 10% of their investment from their corporate income tax (CIT) payable. This article outlines the requirements for qualifying for this new incentive.
China’s Ministry of Finance (MOF) and the State Tax Administration (STA) have launched a preferential corporate income tax (CIT) incentive for companies investing in the digital and intelligent transformation of specific types of equipment. To qualify, companies must invest in upgrading equipment that supports energy and water conservation, environmental protection, or safe production.
This tax incentive is part of a broader State Council Action Plan, introduced in March 2024, which seeks to accelerate the renewal of large-scale equipment and consumer goods. The goal is to promote high-quality development, boost investment, and drive consumption for long-term economic benefits.
What Does the Special Equipment Tax Incentive Entail?
Between January 1, 2024, and December 31, 2027, companies can deduct 10% of their investment in the digital and intelligent transformation of special equipment from their CIT payable in the current year. The deduction applies to investments that do not exceed 50% of the equipment’s original tax base when purchased.
If a company’s annual CIT payable is insufficient to fully offset the deduction, the balance can be carried forward for up to five years.
CIT payable is calculated as the balance after applying the annual taxable income to the relevant tax rate and deducting any tax reductions and exemptions as stipulated by China’s CIT Law and related preferential policies.
Companies benefiting from the tax incentives must use the upgraded equipment themselves. If the equipment is transferred or leased within five tax years of the transformation, the incentives must cease from the month the equipment is no longer in use, and any previously offset CIT must be repaid.
Which Equipment Qualifies for the Tax Incentive?
The tax incentive applies to “special equipment” purchased and used by companies listed in the Catalog of Special Equipment for Safe Production for Corporate Income Tax Incentives (2018 Edition) and the Catalog of Special Equipment for Energy Saving, Water Conservation, and Environmental Protection for Corporate Income Tax Incentives (2017 Edition).
These catalogs specify 145 different pieces of equipment related to energy and water conservation, environmental protection, and safe production. The transformed equipment must meet the conditions outlined in these catalogs to qualify for the tax incentive.
Sample of Special Equipment Eligible for Digital Transformation Tax Incentive
Category | Equipment Type | Equipment |
Energy and water conservation (32 items) | Electric motors | Small and medium-sized three-phase asynchronous motors, Permanent magnet synchronous motors, High voltage three-phase cage asynchronous motors |
Water pumps | Clean water centrifugal pumps, Petrochemical centrifugal pumps | |
Compressors | Positive displacement air compressors | |
Environmental protection (24 items) | Water pollution prevention equipment | Membrane bioreactors, Sludge dewatering machines |
Air pollution prevention and control equipment | Baghouse filters, Electric bag composite dust collectors | |
Safe production (89 items) | Safe production | Gas content and pressure testing equipment, Mine underground advanced detection equipment, Security monitoring equipment |
The digital and intelligent transformation of special equipment involves technical improvements using information and digital technologies to enhance the equipment’s capabilities. This includes the following types of transformations:
Data Collection: Digitising equipment performance parameters, operational status, and environmental information using technologies like sensors, automatic identification, system reading, and industrial control data parsing.
Data Transmission and Storage: Aggregating equipment data using network connections, protocol conversion, and data storage technologies.
Data Analysis: Improving fault diagnosis, predictive maintenance, and optimised operation through in-depth data analysis using processing, statistical analysis, modelling, and simulation technologies.
Intelligent Control: Enhancing equipment monitoring, dynamic parameter adjustment, and feedback control through automation and intelligent technologies.
Digital Security and Protection: Strengthening data confidentiality and integrity with encryption, vulnerability scanning, access control, and redundancy backup technologies.
Other digital and intelligent transformation scenarios specified by fiscal, tax, science, industry, and information technology departments may also qualify.
Special equipment leased through financial leasing can be eligible for tax incentives if ownership is transferred to the lessee at the end of the lease term. However, if ownership is not transferred, the lessee must cease enjoying the incentives and repay any offset CIT.
Eligible Investments
Eligible investments include capital expenditures that contribute to the fixed asset value of the special equipment during its digital and intelligent transformation. This excludes VAT refunds and costs related to transportation, installation, and debugging of the equipment.
Investments made using government grants cannot be used to offset the annual CIT payable.
Other Requirements
Companies must account for equipment transformation investments separately and allocate expenses reasonably. If multiple pieces of equipment are transformed in a tax year, expenses must be allocated individually. Failure to clearly divide expenses may disqualify the company from enjoying the tax incentive.
To qualify, companies must plan the transformation in advance or obtain a registered technical development or service contract from a recognised institution. Relevant documentation should be retained for future reference. If tax authorities cannot verify the investment as a digital and intelligent transformation, they may request identification from industrial and information technology departments in conjunction with science departments at or above the city level.
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