Income Tax

12 Months Ended

Dec. 31, 2023

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%. In 2023, 2022, and 2021, 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 is in a cumulative loss position for the periods presented.

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

	Year Ended December 31,
	2023	2022	2021
Cayman Islands	(16,792)	19,454	28,401
British Virgin Islands	—	2	2
Mainland China	253,274	290,056	340,865
Hong Kong	4,483	53,425	243,400
United States	92,869	79,620	89,374
Australia	14	(260)	1,758
Taiwan	772	989	671
	334,620	443,286	704,471

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,
	2023		2022		2021
Statutory income tax rate	25	%	25	%	25	%
Tax-exempted income	0.19	%	—	%	—	%
Share-based compensation	(2.08	%)	(1.40	%)	(0.92	%)
Research and development super deduction	7.11	%	2.51	%	—	%
Non-deductible expenses	(2.83	%)	(2.31	%)	(5.78	%)
Prior year tax filing adjustment	1.32	%	6.33	%	1.50	%
Effect of different tax rate of subsidiary operation in other jurisdictions	0.02	%	(2.85	%)	(4.60	%)
Preferential tax rate	(7.12	%)	(6.26	%)	(4.30	%)
Expiration of deductible qualified donation	2.28	%	—	%	—	%
Changes in valuation allowance	(23.89	%)	(21.02	%)	(10.90	%)
Effective income tax rate	—	%	—	%	—	%

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

	Year Ended December 31,
	2023	2022
Deferred tax assets:
Depreciation of property and equipment, net	131	98
Research and experimental capitalization	30,429	22,476
Share-based compensation	3,422	1,787
Accrued expenses	707	1,800
Government grants	467	189
Deferred revenue	4,354	3,378
Qualified donation	22,992	12,947
Lease liability	2,967	3,738
Net operating loss carry forwards	295,313	241,397
Less: valuation allowance	(357,956)	(284,072)
Total Deferred tax assets	2,826	3,738
Deferred tax liabilities:
Right-of-use assets	(2,826)	(3,738)
Deferred tax assets, net	—	—

ASC 740, Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. 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 assessing the need for any additional valuation allowance for 2023, the Company considered all available evidence both positive and negative, including potential for prudent and feasible tax planning strategies, recent losses, and forecasts of future profitability. As of December 31, 2023 and 2022, the Company determined that the deferred tax assets on temporary differences and net operating loss carry forwards related to certain subsidiaries will not be realized, and as such it has fully provided the corresponding valuation allowance.

The following table presents that movement of the valuation allowance on deferred tax assets ($ in thousands):

	2023	2022
Balance as of January 1,	(284,072)	(189,684)
Additions	(73,884)	(94,388)
Balance as of December 31,	(357,956)	(284,072)

As of December 31, 2023 and 2022, the Company had net operating loss carry forwards of $1,804.9 million and $1,483.2 million, respectively. As of December 31, 2023, net operating loss carryforwards related to the Company’s subsidiaries in mainland China, Hong Kong, Taiwan, the United States, and Australia and were $1,492.0 million, $51.0 million, $2.1 million, $256.0 million, and $3.8 million, respectively. Net operating loss carryforwards in mainland China and Taiwan expire through 2033 and those in Hong Kong, the United States, and Australia do not expire.

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.

According to the PRC Tax Administration and Collection Law, the statute of limitation is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitation is extended to five years under special circumstances where the underpayment of taxes is more than RMB0.1 million. In the case of transfer pricing issues, the statute of limitation is 10 years. There is no statute of limitation in the case of tax evasion. The income tax returns of the Company’s PRC subsidiary for the years from 2014 to 2023 are open to examination by the PRC tax authorities.

For Hong Kong income tax purposes, the statute of limitations is six years after the relevant year of assessment. This can be extended to 10 years in the case of fraud of willful evasion of taxes. There are no provisions that govern the time limit for tax collection.

For U.S. federal income tax purposes, the statute of limitations is generally 3 years after the due date of the return, or 3 years after the date the return was actually filed, whichever is later. The statute of limitations does not apply to fraud or tax evasion. Also, the statute of limitations is indefinite if no tax return is filed. For state income tax purpose, the statute of limitations is generally 4 years from the return filing date or due date for California, Kentucky, and New Jersey, subject to certain exceptions (e.g., fraud, failure to file).