Income Tax

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Tax

Income Tax

Cayman Islands

Zai Lab Limited, ZLIP Holding Limited, Zai Auto Immune Limited, and Zai Anti Infectives Limited are incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, Zai Lab Limited, ZLIP Holding Limited, Zai Auto Immune Limited, and Zai Anti Infectives Limited are not subject to tax on income or capital gain. Additionally, the Cayman Islands does not impose a withholding tax on payments of dividends to shareholders.

British Virgin Islands Taxation

ZL Capital Limited is incorporated in the British Virgin Islands. Under the current laws of the British Virgin Islands, ZL Capital Limited is not subject to income tax.

Australia

Zai Lab (AUST) Pty. Ltd. is incorporated in Australia and is subject to corporate income tax at a rate of 30%. Zai Lab (AUST) Pty. Ltd. had no taxable income for the periods presented; therefore, no provision for income taxes is required.

United States

Zai Lab (US) LLC is incorporated in the United States and is subject to U.S. federal corporate income tax at a rate of 21%. Zai Lab (US) LLC is also subject to state income tax in Delaware. Zai Lab (US) LLC had no taxable income for the periods presented; therefore, no provision for income taxes is required.

Taiwan

Zai Lab (Taiwan) Limited is incorporated in Taiwan and is subject to corporate income tax at a rate of 20%. Zai Lab (Taiwan) Limited had no taxable income for the periods presented; therefore, no provision for income taxes is required.

Hong Kong

Zai Lab (Hong Kong) Limited, ZL China Holding Two Limited, Zai Auto Immune (Hong Kong) Limited, and Zai Anti Infectives (Hong Kong) Limited are incorporated in Hong Kong. Companies registered in Hong Kong are subject to Hong Kong profits tax on the taxable income as reported in their respective statutory financial statements adjusted in accordance with relevant Hong Kong tax laws. Under the two-tiered profits tax rates regime in Hong Kong, the first HK$2 million of profits of the qualifying group entity will be taxed at 8.25%, and profits above HK$2 million will be taxed at 16.5%. For the years ended December 31, 2022, 2021, and 2020, Zai Lab (Hong Kong) Limited, ZL China Holding Two Limited, Zai Auto Immune (Hong Kong) Limited, and Zai Anti Infectives (Hong Kong) Limited did not make any provisions for Hong Kong profit tax as there were no assessable profits derived from or earned in Hong Kong for any of the periods presented. Under the Hong Kong tax law, Zai Lab (Hong Kong) Limited, ZL China Holding Two Limited, Zai Auto Immune (Hong Kong) Limited, and Zai Anti Infectives (Hong Kong) Limited are exempted from income tax on its foreign-derived income, and there are no withholding taxes in Hong Kong on remittance of dividends.

People’s Republic of China

Under EIT Law, the statutory income tax rate is 25%, and the EIT rate will be reduced to 15% for state-encouraged High and New Technology Enterprises (“HNTE”). Zai Lab (Shanghai) Co., Ltd., first obtained a HNTE certificate in 2018 and began to enjoy the preferential tax rate of 15% from 2018 to 2020 and further extended the certificate in 2021 effective for 2021 to 2023. Zai Lab International Trading (Shanghai) Co., Ltd., Zai Lab (Suzhou) Co., Ltd., Zai Biopharmaceutical (Suzhou) Co., Ltd., and Zai Lab Trading (Suzhou) Co., Ltd. are subject to the statutory rate of 25%.

No provision for income taxes has been required to be accrued because the Company and all of its subsidiaries are in cumulative loss positions for the periods presented.

The following table presents loss (income) before income taxes (in thousands):

	Year Ended December 31,
	2022	2021	2020
	$	$	$
Cayman Islands	19,454	28,401	2,612
British Virgin Islands	2	2	3
Mainland China	290,056	340,865	220,813
Hong Kong	53,425	243,400	20,022
United States	79,620	89,374	24,616
Australia	(260)	1,758	839
Taiwan	989	671	—
	443,286	704,471	268,905

Reconciliations of the differences between the Chinese statutory income tax rate and the Company’s effective income tax rate are as follows:

	Year Ended December 31,
	2022		2021		2020
Statutory income tax rate	25	%	25	%	25	%
Share-based compensation	(1.40	%)	(0.92	%)	(1.36	%)
Research and development super deduction	2.51	%	—	%	—	%
Non-deductible expenses	(2.31	%)	(5.78	%)	(1.17	%)
Prior year tax filing adjustment	6.33	%	1.50	%	1.78	%
Effect of different tax rate of subsidiary operation in other subsidiaries	(2.85	%)	(4.60	%)	(1.04	%)
Preferential tax rate	(6.26	%)	(4.30	%)	(7.48	%)
Changes in valuation allowance	(21.02	%)	(10.90	%)	(15.73	%)
Effective income tax rate	—	%	—	%	—	%

The following table presents the principal components of deferred tax assets and liabilities (in thousands):

	Year Ended December 31,
	2022	2021	2020
	$	$	$
Deferred tax assets:
Depreciation of property and equipment, net	98	108	84
Research and experimental capitalization	22,476	—	—
Share-based compensation	1,787	—	—
Accrued expenses	1,800	—	—
Government grants	189	496	400
Deferred revenue	3,378	3,733	2,069
Qualified donation	12,947	10,246	7,627
Net operating loss carry forwards	241,397	175,101	94,954
Less: valuation allowance	(284,072)	(189,684)	(105,134)
Deferred tax assets, net	—	—	—

The Company considers positive and negative evidence to determine whether some portion or all of the deferred tax assets will be more likely than not realized. This assessment considers, among other matters, the nature, frequency, and severity of recent losses and forecasts of future profitability. These assumptions require significant judgment, and the forecasts of future taxable income are consistent with the plans and estimates the Company is using to manage the underlying businesses. Valuation allowances are established for deferred tax assets based on a more likely than not threshold. The Company’s ability to realize deferred tax assets depends on its ability to generate sufficient taxable income within the carry forward periods provided for in the tax law. In 2022 and 2021, the Company determined that the deferred tax assets on temporary differences and net operating loss carry forwards were related to certain subsidiaries, for which the Company is not able to conclude that the future realization of those net operating loss carry forwards and other deferred tax assets are more likely than not. As such, it has fully provided valuation allowance for the deferred tax assets as of December 31, 2022 and 2021. As of December 31, 2022, 2021 and 2020, the Company had net operating losses of approximately $1,483.2 million, $1,089.7 million, and $605.2 million, respectively. As of December 31, 2022, net operating loss carryforwards related to the Company’s subsidiaries in mainland China, Hong Kong, Taiwan, the United States, and Australia are $1,225.9 million, $43.9 million, $1.5 million, $208.1 million, and $3.8 million, respectively. Net operating loss carryforwards in mainland China and Taiwan expire through 2032 and those in Hong Kong, the United States, and Australia do not expire.

The following table presents that movement of the valuation allowance:

	2022	2021
	$	$
Balance as of January 1,	(189,684)	(105,134)
Additions	(94,388)	(84,550)
Balance as of December 31,	(284,072)	(189,684)

Uncertainties exist with respect to how the current income tax law in mainland China applies to the Company’s overall operations, and more specifically, with regard to tax residency status. The EIT Law includes a provision specifying that legal entities organized outside of mainland China will be considered residents for Chinese income tax purposes if the place of effective management or control is within mainland China. The implementation rules to the EIT Law provide that non-resident legal entities will be considered Chinese residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, and properties occurs within mainland China. Despite the present uncertainties resulting from the limited Chinese tax guidance on the issue, the Company does not believe that the legal entities organized outside of mainland China within the Company should be treated as residents for EIT Law purposes. If the Chinese tax authorities subsequently determine that the Company and its subsidiaries registered outside of mainland China should be deemed resident enterprises, the Company and its subsidiaries registered outside of mainland China will be subject to Chinese income taxes, at a rate of 25%. The Company is not subject to any other uncertain tax position.