Commentary: An Unreasonable Tax Is Hindering Technological Innovation

The article, written by Zhou Tianyong, highlights a major concern regarding China's current tax policy on intellectual property (IP) contributions for entrepreneurs. The main issue stems from the fact that individuals who create and own patents or software copyrights are required to pay a 20% personal income tax when contributing this IP as equity to their own companies—even before the business begins operations or generates any profit. This upfront taxation occurs prior to realizing any return on what is often a significant personal investment[para. 1].

Most technology patents are developed by individuals who dedicate substantial time, effort, and personal resources to research and development (R&D). The article stresses that R&D inherently carries high risk and involves extensive exploratory work, including refining ideas, building models, and running simulations. These processes accumulate considerable human, material, and financial costs. From a financial perspective, R&D should be classified as a cost (not income), yet current policy treats the act of contributing IP as “income,” thus triggering an immediate 20% income tax—a rationale the author finds flawed[para. 2].

This taxation regime dampens the entrepreneurial enthusiasm of researchers and inventors. When these individuals want to convert their inventions into business ventures, they must first pay for a valuation of their IP, and then pay 20% of its assessed value in tax before their companies can operate. The process thus creates a substantial barrier and suppresses startup initiatives, particularly among those who lack substantial financial backing. The article provides an example of a researcher who invested 13 million yuan ($1.8 million) in R&D by selling his second home. Although he found an angel investor, he faced a 2.6 million yuan tax bill—only for contributing his own patent as equity. The risk of losing his remaining assets, especially if the business ultimately fails, is simply too great to bear[para. 3][para. 4].

The inventor’s concerns are encapsulated in his statement urging authorities not to “kill the chicken to get the egg,” suggesting that collecting high taxes before a business is viable undermines innovation and potential future tax revenue. He argues that taxing profits generated later, rather than upfront, would be more logical and beneficial[para. 5].

Comparing China’s IP-tax policy to those of other countries, the author found that most developed nations actually incentivize, rather than penalize, IP-related entrepreneurial activity. Many have implemented “Patent Box” regimes with significantly reduced tax rates on IP-related income. For example, the Netherlands taxes eligible patent income at 5%, Spain reduces the tax base for IP income by up to 60%, the UK applies a 10% tax, and Cyprus enables an effective rate of about 2.5%. Luxembourg and other nations offer similar incentives. The US, while not having a uniform federal regime, generally treats income from IP transfers more leniently and states often offer exemptions to attract technology companies[para. 6][para. 7][para. 8][para. 9][para. 10][para. 11].

These comparative international experiences demonstrate that China’s approach is both out of step with best practices and counterproductive in unleashing innovation. As researchers are crucial for China’s progress in science and technology, the author calls for a comprehensive reevaluation and abolition of the 20% tax on IP contributions for new ventures. Such a reform, he argues, would unlock entrepreneurial potential and invigorate innovation-driven development in China[para. 12][para. 13]. The author, Zhou Tianyong, is a former vice president of the International Strategy Institute at the Central Party School[para. 14]. The views in the article reflect his personal perspective[para. 15].