Editor’s Note:

As of May 25, 2026, more than 2,900 enterprises nationwide have had their High and New Technology Enterprise (HNTE) qualifications revoked during the year, reflecting a continuing trend of stricter regulatory oversight of HNTE status across China. This underscores the requirement that enterprises must continuously meet the qualification criteria throughout the validity period of their HNTE status and maintain ongoing, dynamic compliance. Against this backdrop, this article, drawing on relevant tax-related cases, systematically examines the tax risks arising in the application of preferential tax policies for HNTEs and provides tax compliance recommendations for reference by high-tech enterprises.

01

Qualification Recognition and Regulatory Developments for High and New Technology Enterprises

(I) Qualification Criteria and Tax Incentives for HNTEs

According to the Administrative Measures for the Recognition of High and New Technology Enterprises (Guo Ke Fa Huo [2016] No. 32), the qualification criteria for HNTEs cover eight aspects: date of establishment, intellectual property rights, technological fields, scientific and technical personnel, R&D investment, high-tech revenue, innovation capability, and absence of material legal violations.

Among these, regulatory review focuses primarily on two key indicators. First, the ratio of R&D expenses to sales revenue, which is applied on a tiered basis according to the enterprise’s revenue in the most recent year: not less than 5% for enterprises with annual revenue not exceeding RMB 50 million; not less than 4% for enterprises with annual revenue between RMB 50 million and RMB 200 million; and not less than 3% for enterprises with annual revenue exceeding RMB 200 million. In addition, R&D expenses incurred within China must account for no less than 60% of total R&D expenses. Second, revenue from high-tech products (or services) must account for no less than 60% of the enterprise’s total revenue for the corresponding period.

Once an enterprise obtains HNTE status, it may enjoy preferential tax treatment with respect to Enterprise Income Tax (EIT), Individual Income Tax (IIT), and Value-Added Tax (VAT). For EIT purposes, qualified HNTEs are subject to a reduced preferential tax rate of 15%, may benefit from preferential treatment and tax credit arrangements for foreign-source income, and may extend the tax loss carryforward period from 5 years to 10 years. For IIT purposes, equity incentives granted to scientific and technical personnel of HNTEs, as well as the conversion of undistributed profits, surplus reserves, or capital reserves into share capital by small and medium-sized HNTEs, may be eligible for deferred or installment tax payment treatment in accordance with relevant regulations. For VAT purposes, eligible advanced manufacturing enterprises may apply the additional VAT input credit deduction policy.

(II) Increasingly Stringent Regulatory Oversight of HNTE status

To encourage enterprises to increase R&D investment and enhance independent innovation capabilities, the State has continuously improved its policy framework supporting technological innovation, with tax incentives for HNTEs as a core component, thereby reducing innovation costs and guiding innovative resources toward the technology sector. While policy benefits continue to be released, regulatory oversight of HNTE status has become increasingly stringent. According to publicly available data, as of May 25, 2026, approximately 2,900 enterprises nationwide had their HNTE statuss revoked during the year, involving multiple regions including Shandong, Henan, Fujian, and Shanghai.

The revocation of HNTE status will trigger a series of adverse consequences. Specifically:

From a tax perspective, enterprises will be required to make additional tax payments and pay corresponding late payment surcharges. With respect to EIT, where an enterprise no longer qualifies for other preferential tax regimes (such as the Western Development tax incentive), it must discontinue application of the 15% preferential EIT rate, revert to the standard 25% tax rate, and pay the tax shortfall arising from the non-compliant years. In addition, with respect to VAT and surtaxes, where the enterprise qualifies as an advanced manufacturing enterprise, its eligibility for the additional VAT input credit deduction policy will also be revoked, leading to corresponding adjustments and supplementary payments of related surtaxes, including Urban Maintenance and Construction Tax and Education Surcharges. These tax adjustments will also be subject to late payment surcharges, placing additional pressure on corporate cash flow.

From a non-tax perspective, the revocation of HNTE status may have the following main impacts. First, in terms of fiscal support, R&D subsidies and special science and technology funds previously obtained by the enterprise may be subject to repayment or clawback risks, and future eligibility for such applications may also be restricted. Second, in terms of financing and capital markets, as HNTE status serves as an important factor in credit assessment, its revocation may lead to a reassessment of the enterprise’s credit profile, resulting in tighter credit conditions, higher financing costs, and valuation adjustments. Third, in terms of market access and industrial supply chains, enterprises that rely on HNTE status for participation in government procurement, state-owned enterprise cooperation, or supply chain entry may face stricter entry requirements and a reduction in available cooperation opportunities.

02

Typical Recent Tax-Related Cases Involving High and New Technology Enterprises

(I) Case of Fabricating R&D Activities at the HNTE Application Stage to Illegally Obtain Tax Incentives

In January 2026, the State Taxation Administration issued a notice concerning a case in which a tax intermediary assisted an enterprise in submitting false applications for HNTE status. Through tax risk analysis, the tax authorities identified that, in the application materials of a high-tech pharmaceutical enterprise, the proportion of R&D personnel was significantly inconsistent with the structure of R&D expenditures. In particular, outsourced R&D expenses accounted for more than 80% of total R&D expenditure and remained at a consistently high level exceeding RMB 10 million over a prolonged period.

Upon investigation, it was found that the enterprise had inflated its R&D expenses through fabricated R&D projects and the use of false invoices, and that the relevant R&D activities lacked substantive authenticity.

The investigation further confirmed that the enterprise obtained HNTE status through the above-mentioned fraudulent means, resulting in an underpayment of tax of RMB 2.3399 million, and unlawfully obtained local government subsidies of RMB 200,000. The tax authorities imposed a penalty on the intermediary involved equivalent to 0.5 times the amount of the underpaid tax of the enterprises it represented, and transferred relevant leads involving false invoicing and assisting the enterprise in fraudulently obtaining subsidies to the public security authorities for further investigation.

(II) Case of Tax Reassessments and Late Payment Surcharges Arising from Partial Ineligibility for HNTE Tax Preferential Treatment

On May 9, 2026, Wuxi Taiji Industry Co., Ltd. announced that its subsidiary, the Eleventh Design and Research Institute of Information Industry Electronic Engineering Co., Ltd., had undergone a tax inspection by the competent tax authority in Chengdu covering the period from 2020 to 2024. The tax authority determined that certain business activities did not meet the requirements for entitlement to the EIT preferential treatment applicable to HNTEs. In addition, due to duplicate selection of input VAT invoices during an electronic tax system upgrade, the enterprise had underpaid taxes.

According to the disclosure, the subsidiary was required to make additional payments of EIT in excess of RMB 252 million, VAT and surtaxes amounting to RMB 76.005 million, and late payment surcharges exceeding RMB 149 million.

(III) Case of Tax Liability Adjustments Following Revocation of HNTE Status

According to disclosures by listed companies in recent years, large-scale additional tax payments arising from the revocation of HNTE status have become increasingly common. On December 12, 2025, Kuaiyi Elevator Co., Ltd. announced that, due to the revocation of its HNTE status for the period from 2021 to 2023, it was required to repay previously enjoyed tax incentives and corresponding late payment surcharges. Following a comprehensive self-review of all tax-related matters, the company was required to make additional tax payments of RMB 22.1593 million, together with late payment surcharges of RMB 6.5428 million, amounting to a total of RMB 28.7021 million.

In comparison, certain manufacturing enterprises are also subject to simultaneous adjustments involving VAT preferential treatments, resulting in significantly larger repayment amounts. On May 19, 2026, Yunnan Copper Co., Ltd. disclosed that its subsidiary, Chifeng Yun Copper Nonferrous Metals Co., Ltd., had been required, due to the revocation of its HNTE status effective from 2022, to make additional tax payments and late payment surcharges. These included the reversal of the 5% additional VAT input tax credit deduction previously applied under the preferential policy for advanced manufacturing enterprises (i.e., general VAT taxpayers within HNTE manufacturing enterprises), amounting to RMB 356 million in VAT adjustments, RMB 44.6207 million in Urban Maintenance and Construction Tax, Education Surcharge and other levies, as well as RMB 110 million in late payment surcharges, bringing the total to RMB 512 million.

03

Analysis of Tax Risks for High and New Technology Enterprises

(I) Revocation of HNTE Status Due to Failure to Satisfy Qualification Requirements

According to the Guidelines for the Administration of High and New Technology Enterprise Recognition (Guo Ke Fa Huo [2016] No. 195), where the relevant authorities discover during routine administration that a recognized HNTE no longer satisfies the applicable qualification requirements, they shall submit the matter in writing to the recognition authority for review. Where the review confirms non-compliance with the qualification criteria, the recognition authority shall revoke the enterprise’s HNTE status and notify the tax authorities to recover the tax incentives previously enjoyed by the enterprise from the year in which it ceased to meet the qualification requirements.

In regulatory practice, the risks leading to the adjustment or revocation of HNTE status are primarily concentrated in the following two core indicators.

First, failure to satisfy the required R&D expense ratio. In practice, this indicator is most susceptible to imbalance due to factors such as rapid revenue growth not being matched by corresponding R&D investment, non-standard methodologies for expense allocation, or abnormally high proportions of outsourced R&D activities. These issues may cause the ratio of R&D expenses to sales revenue to fall below the statutory threshold, thereby triggering regulatory review and affecting the continuation of HNTE status.

Second, failure to satisfy the required proportion of revenue derived from high-tech products (or services). This indicator is highly sensitive to revenue classification methodologies. In addition to ambiguity in distinguishing product revenue from technical service income, common issues in practice include the failure to include property-related income—such as gains from equity transfers or asset disposals—in total revenue calculations, as well as the failure to reconcile accounting revenue calculated under the net method with tax reporting standards. Such issues may cause the ratio to fall below the 60% threshold.

In addition to the two core indicators above, other circumstances may also result in adjustment of HNTE status, including failure to satisfy the required proportion of scientific and technical personnel, material violations relating to safety, quality, or environmental protection, and failure to submit annual development reports in accordance with regulatory requirements.

(II) False Applications Submitted to Obtain HNTE status

At the application stage, some enterprises, despite not actually satisfying the relevant criteria for HNTE recognition, submit false applications through fabricated supporting materials in order to obtain various tax incentives available to HNTEs. Such conduct is intended to create formal compliance and fraudulently secure HNTE status.

Typical practices include: fabricating R&D activities or inflating the scale of R&D investment in order to satisfy the required R&D expense ratio; artificially inflating technical service income or restructuring business operations to increase the proportion of high-tech revenue; fabricating or improperly aggregating personnel information to meet the required ratio of scientific and technical personnel; and rapidly acquiring, centrally transferring, or improperly utilizing intellectual property rights to enhance the apparent compliance of application materials.

Under the current regulatory framework featuring end-to-end tax big-data analysis, penetration-based cross-verification, and anomaly screening of industry indicators, such unlawful conduct can be identified with considerable precision. As the enterprise’s conduct involves intentionally fabricating key indicators to satisfy HNTE recognition requirements, under the principle of consistency between subjective intent and objective conduct, the foregoing falsification may give rise to a presumption of subjective intent to evade tax.

Once the conduct is determined to constitute tax evasion, the tax authorities may impose a penalty ranging from 0.5 to 5 times the amount of underpaid tax. Where the enterprise fails to fully pay the outstanding tax, late payment surcharges, and penalties within the time limit prescribed by the tax authorities, the administrative liability for tax evasion may escalate into criminal liability for the offense of tax evasion. In addition, where an enterprise obtains local government subsidies through fraudulent HNTE applications, such conduct may also give rise to potential criminal liability for fraud.

04

Tax Compliance Recommendations for High and New Technology Enterprises

(I) Improving Internal Financial and Tax Compliance Control Systems

Against the backdrop of increasingly strengthened penetration-based tax supervision, HNTEs should reinforce full-process compliance management in the application of tax incentives. Enterprises should, based on the authenticity of R&D activities and the substantive nature of business operations, improve internal control mechanisms and evidentiary systems in order to mitigate tax-related risks.

First, enterprises should strengthen management over application filings and the authenticity of business activities. A pre-review mechanism for business activities should be established, with particular emphasis on examining the technical nature of the business, relevant intellectual property rights, and supporting documentation.

Second, enterprises should promote integrated accounting between business operations and tax reporting. HNTE-related and non-HNTE-related businesses should be clearly distinguished, while the classification and allocation of revenue, costs, and expenses should be standardized. Revenue recognition methodologies should also be unified, with particular attention given to preventing transactions such as asset disposals and equity transfers from affecting the calculation of the high-tech revenue ratio.

Third, enterprises should improve documentation retention and evidence-chain management. Enterprises should systematically retain all materials relevant to HNTE status recognition, including R&D project initiation records, expense allocation documentation, intellectual property materials, and supporting evidence substantiating the technical nature of products, services, and related revenue, so as to satisfy the requirements of penetration-based regulatory review.

Fourth, enterprises should strengthen group-level penetration-based compliance control. HNTE status management should be incorporated into centralized group governance, with dynamic monitoring and random inspections implemented for subsidiaries and integrated into operational performance assessment systems, thereby preventing compliance risks from transmitting to the group level.

(II) Establishing Dynamic Monitoring, Self-Inspection, and Risk Response Mechanisms for Key Indicators

HNTE status is a fundamental prerequisite for the application of preferential tax policies. It is not a one-time recognition result, but rather a continuing state of compliance. Accordingly, enterprises should establish a full-process dynamic management mechanism covering monitoring, early warning, and remediation, thereby shifting from static application-based management to process-oriented compliance control.

On the one hand, enterprises should establish a routine monitoring system centered on core indicators such as the ratio of R&D expenses, the proportion of high-tech revenue, and the proportion of scientific and technical personnel. Trend tracking and deviation analysis should be conducted for key indicators in order to promptly identify circumstances where indicators approach critical thresholds or continuously deviate from recognition standards, thereby enhancing the forward-looking nature of risk identification.

On the other hand, enterprises should establish a regular self-inspection mechanism by embedding compliance management throughout the entire annual operational process. Systematic reviews should be conducted prior to annual audits and annual tax reconciliation filings in order to promptly correct data discrepancies and inconsistencies in statistical and accounting methodologies.

At the same time, enterprises should improve risk response and rectification mechanisms. Where indicator anomalies or classification errors have been identified, enterprises should promptly implement corrective measures through adjustments to accounting methodologies, supplementation of supporting documentation, optimization of business classification, or targeted remediation initiatives, thereby forming a closed-loop management system and reducing tax risks arising from cross-year adjustments.

In addition, where disputes arise with regulatory authorities regarding HNTE recognition or revenue classification methodologies, enterprises should promptly provide explanations through communication with the relevant authorities and by supplementing supporting evidentiary materials. For complex matters involving cross-period adjustments, characterization of revenue, or allocation of R&D expenses, enterprises may engage professional advisory teams to provide specialized analysis and compliance support, thereby improving the professionalism and responsiveness of dispute resolution and reducing the risk of additional tax assessments.