Since the beginning of the year, China’s Finance Ministry has introduced a series of tax cuts and levies to bolster Small and Micro Enterprises’ (SMEs) competitiveness.
Take a look at some of our previous articles: Social Contribution Rates Cuts Implemented Across China
While small businesses in China remain optimistic about their growth, results from CPA Australia’s 10th annual Asia-Pacific Small Business Survey indicate that overall confidence is weakening. 71 percent of small businesses from Mainland China were expected to generate more profits in 2019, 7 percent less than the year before.
In a landscape fraught with trade tensions and rising operating costs, how will the tax incentives impact small enterprises in China? Keep reading to find out.
Small and Micro-Enterprises Defined
One of the major announcements from the authorities refers to the definition of Small and Micro-Enterprises. With the new measures, the scope of SMEs eligible for Corporate Income Tax cuts is considerably enlarged. Below is a comparison of the old and new criteria, as detailed in the Notice on Implementing the Policy of Inclusive Tax Relief for Small and Micro Enterprises (Cai Shui [2019] No 13).
Through this new policy, China’s Ministry of Finance expects to reduce the tax burden of 95 percent of small and micro taxpaying enterprises in the country, (17.98 million in total) of which 98 percent are privately run.
Key Tax Relief Measures
CIT Reductions
One of the highlights of the newly announced measures is the implementation of generous cuts in Corporate Income Tax rates. The following criteria will now apply for qualified small-scale and low-profit enterprises:
- If the company’s annual income does not exceed RMB 1 million, CIT is only levied on 25 percent of that income at a 20 percent reduced rate. The effective Corporate Income Tax rate for these companies is effectively reduced to just 5 percent.
- If the company’s annual income is comprised between RMB 1 million and RMB 3 million, CIT is calculated on 50 percent of that income at a 20 percent reduced rate. In other words, the effective Corporate Income Tax rate for these companies is just 10 percent.
Previously, companies with annual taxable income over RMB 1 million did not fall into the Small and Low-Profit Enterprises scope. Taxes were levied on their total income at the standard 25 percent rate.
Thanks to the new regulations, eligible enterprises can make considerable savings on their tax payments. Let’s have a closer look at the impact of the new CIT rates on SMEs with the example below.
Company A has RMB 20 million in total assets, employs 100 staff, and has an annual taxable income of RMB 2.4 million.
Before 2019:
The company didn’t meet the requirements to qualify as a Small and low-profit enterprise. CIT would be calculated on its full income at the standard rate.
CIT= 2.4 million * 25%= RMB 600,000
After 2019:
The company is now eligible for preferential tax rates. CIT will be calculated in two steps, 25% of the first 1 million and 50% of the remaining 1.4 million, both at a reduced 20% rate.
On the first 1 million= 1 million * 25%*20% = 50,000
On the remaining 1.4 million= 1.4 million * 50%*20% = 140,000
Total CIT= 190,000
Starting from January 2019, this company will be saving more than 68 percent on its CIT payments.
VAT
In addition to reductions in CIT rates, new thresholds for VAT exemption have been announced. VAT reform has been a priority item on Beijing’s agenda over the last decade. The government slashed VAT rates across a range of industries in 2018, resulting in about RMB 270 billion in tax cuts within just 6 months of implementation.
The VAT threshold for small-scale taxpayers has now been raised from RMB 30,000 to RMB 100,000. (principally small and micro-businesses and family-owned businesses) has been raised from monthly sales of RMB 30,000 to RMB 100,000 (or RMB 300,000 quarterly).
It is worth noting that businesses that derive a monthly VAT taxable income over RMB 100,000 may also benefit from the exemption policy. This is only possible if the balance after deducting the sales amount of real estate occurring in the current period is below RMB 100,000.
In addition, general VAT taxpayers with cumulative sales of RMB 5 million or less for 12 consecutive months could choose to re-register as a small-scale VAT taxpayer in December 2019. Such conversion was previously not allowed by authorities. With only 6 months ahead before the end of the year, we highly recommend conducting a full sales forecast to assess whether the transition to a small VAT taxpayer status would be beneficial for your business.
Preferential Policies for Startups
The Chinese government’s stimulus package also includes generous tax rebates for venture capital (VC) companies and relaxed standards to qualify as a startup. Since January 2019, venture capital firms and individual investors can enjoy a 70 percent deduction on their taxable income. This is expected to provide a major investment boost in the tech sector and bolster innovation as growth in the traditional manufacturing sector keeps slowing.
In addition, criteria for enterprises to qualify as startups have been extended as follows:
Before the policy adjustment: startup companies could only have a maximum of 200 employees and total assets and annual income not exceeding RMB 30 million.
After the policy adjustment: Startup companies can have as many as 300 employees and total assets and annual income up to RMB 50 million.
Key takeaway
Since 2018, Beijing hasn’t spared any efforts to improve the Chinese business environment, promoting a wide range of preferential individual and corporate tax measures. As we’ve seen above, the new Corporate Income Tax cuts can result in substantial savings for low-profit firms and small private enterprises.
Tax planning and optimization are crucial in order to avoid paying more than you should as a small business owner – contact us today to discuss your specific business situation.
(This article was published on July 26, 2019, and was updated on December 30, 2020.)
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