China’s Tax Incentives for the Manufacturing Sector in 2023

Posted by Written by Arendse Huld Reading Time: 10 minutes

In an effort to boost economic growth, the Chinese government has extended a series of tax policies first implemented during the COVID-19 pandemic, adding to the existing long-term policies to support industry growth and innovation. We provide an overview of some of the preferential tax policies available to manufacturing companies in China, including policies to reduce the tax burdens of smaller companies, tax incentives to increase innovation and investment, and region-specific corporate income tax reductions.

China’s manufacturing sector remains one of the most important drivers of the country’s economic growth. As China emerges from the pandemic, the government is seeking to boost the industry’s development by highlighting the preferential and support policies that reduce tax and fee burdens on companies in this sector. 

In addition to existing long-term preferential tax policies, China has recently extended COVID-era preferential tax policies that were due to expire at the end of 2023 to 2027. Many of these policies are also applicable to manufacturing companies of various sizes. 

In this article, we highlight some of the preferential tax and fee policies that are currently available to manufacturing companies, including reductions to CIT and VAT, as well as various fee and expense deductions. Note that many of these policies may be available to companies in other industries as well. 

Tax incentives for small and low-profit manufacturing companies 

China has extended a raft of preferential tax policies aimed at supporting small and low-profit businesses in 2023. 

These policies are applicable to small and low-profit companies in all industries. However, due to the relatively low eligibility threshold for sales volume and profits, in the manufacturing industry, they will mostly be applicable to light manufacturing companies that produce smaller amounts of consumer-oriented products. 

The preferential policies for small and low-profit enterprises are summarized in the table below.

Policy  Eligible companies  Policy details  Timeline 
Reduced CIT rate for SLPEs 
  1. Companies with annual taxable income under RMB 3 million (approx. US$458,500);
  2. Companies with less than 300 employees; and
  3. Companies with a total asset value of less than RMB 50 million (approx. US$7.7 million) 
 Reduced 20 percent CIT rate  January 1, 2022/2023 to December 31, 2027 
Reduced individual income tax (IIT)  Individually-owned businesses  50 percent reduction of payable IIT amount for the portion of taxable income not exceeding RMB 1 million (approx. US$152,800)  January 1, 2023 to December 31, 2027 
Reduction of “six taxes and two fees” for small-scale taxpayers  Small-scale VAT taxpayers, SLPEs, and individually-owned businesses  Reduced 50 percent levy rate for: 

  • Six taxes: resource tax, urban maintenance and construction tax, real estate tax, urban land use tax, stamp duty (excluding securities transaction stamp duty), and cultivated land occupation tax); and 
  • Two fees: education surcharge and local education surtax. 
 January 1, 2022 to December 31, 2027 
Note: The above list is not exhaustive. 

For more information on China’s preferential tax policies for small businesses, see also our articles on the 2023 VAT Incentives for Small-Scale Taxpayers and China’s Tax Incentives for Small Businesses. 

Preferential VAT and premiums reduction policies 

The Chinese government has extended a series of VAT credit refund policies and insurance premium reduction policies that were first implemented before or during the pandemic.

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These include exemptions and reductions of VAT for small-scale taxpayers with monthly sales of under RMB 100,000 (approx. US$14,740) and reduction of employment security fund payments for disabled persons. 

For context, companies in China have a minimum quota of disabled employees that they must hire, which differs from province to province. Companies that don’t meet this quota have to pay into a fund called the Baozhang Jin (保障金). The necessary amount again varies according to location, but the majority of companies choose to pay into the fund rather than employ the requisite number of disabled workers that would absolve them from paying. 

See our article on hiring disabled staff members in China for more information.

Policy  Eligible companies  Policy details  Timeline 
Exemption and reduction of VAT 
  1. Small-scale taxpayers with monthly sales of under RMB 100,000 (approx. US$14,740) and quarterly sales of under RMB 300,000 (approx. US$44,220).
  2. Taxpayers eligible for 3 percent VAT levy rate.
  1. Exempt from VAT payments.
  2. Reduced VAT levy rate of 1 percent (in addition, VAT items that are subject to a 3 percent VAT prepayment rate enjoy a reduced prepayment rate of 1 percent).
 January 1, 2023 to December 31, 2027 
VAT refund policy for enterprises in industries including manufacturing, wholesale, and retail  Qualified companies in the manufacturing industry. Application for a one-time refund of accumulated deferred tax credits. For micro-enterprises: tax declaration period of April 2022 

For small enterprises: tax declaration period of May 2022 

For medium-sized enterprises: tax declaration period of May 2022 

For large enterprises: tax declaration period of June 2022
End-of-period VAT deduction from the tax basis of certain taxes and fees  General taxpayers implementing VAT refunds at the end of the period. Deduction of the refunded VAT amount from the tax calculation basis of the urban maintenance and construction tax, education surcharge, and local education surcharge. From July 27, 2018 onward 
Phased reduction of social insurance premiums  Employers participating in unemployment insurance.  Phased reduction of the unemployment insurance premium rate to 1 percent (the employer-employee payment ratio is set by each province, e.g., in Guangdong, employers pay 0.8 percent and employees pay 0.2 percent).  End of 2024 
Reduction of employment security fund payments for disabled persons  Companies that meet the requisite disability employment ratios. 
  1. Employers with a disability employment ratio of 1 percent or more, but who do not meet the ratio stipulated by the local government, are allowed to pay just 50 percent of the required employment security fund payments; employers with a disability employment ratio below 1 percent are permitted to pay 90 percent of the required employment security funds payment.
  2. Enterprises with 30 or fewer in-service staff members will continue to be exempt from disability employment security fund payments. 
 January 1, 2023 to December 31, 2027 
Note: The above list is not exhaustive. 

Reduced CIT rate in key development zones 

Several key development and free trade zones (FTZs) in China offer a reduced 15 percent CIT rate for companies in encouraged industries (China’s standard CIT rate is 25 percent). Each development zone has its own local rules regarding the industries that can enjoy the preferential CIT rate, as well as requirements for the minimum size of operations within the area to be eligible. 

The development zones offering the reduced 15 percent CIT rate for companies in various manufacturing fields are summarized in the table below. 

Eligible Industries and Requirements for 15% CIT Rate
Zone Eligible industries Latest catalog of encouraged industries Effective period
Lingang New Area (Shanghai) Integrated circuits:

  • Manufacturing of advanced semiconductor technology, equipment, and components; and
  • Manufacturing of key semiconductor materials.

Artificial intelligence:

  • Manufacturing of AI chips;
  • Manufacturing of smart hardware;
  • Manufacturing of smart sensors;
  • Manufacturing of smart robots;
  • Manufacturing of smart connected vehicles and smart new energy vehicles; and
  • Manufacturing of smart equipment and materials.

Biomedicine:

  • Manufacturing of biological products;
  • Manufacturing of high-end Chinese and Western pharmaceuticals; and
  • Manufacturing of high-end medical equipment and devices.

Civil aviation: 

  • Manufacturing of complete civil aircraft and key systems;
  • Manufacturing of aviation engines and core components; and
  • Manufacturing of key aviation materials.
 Catalog of Core Links in the Key Fields of Integrated Circuits, Artificial Intelligence, Biomedicine, and Civil Aviation January 1, 2020 – no end date (companies can enjoy the preferential policy for up to five years from the date of establishment in the area)
Fujian Pingtan (Fuzhou) Certain types of manufacturing in the following industries:

  • High-end technology;
  • Modern services;
  • Agriculture and aquaculture;
  • Ecology and environment; and
  • Public infrastructure management.
 Catalog of Encouraged Industries Eligible for CIT Preferential Treatment (2021 Edition) January 1, 2021 to December 31, 2025
Hengqin Cooperation Zone (Zhuhai) Manufacturing in industries including:

  • High-tech;
  • Healthcare and pharmaceuticals; and
  • Tourism (specifically manufacturing of yachts).
 Hengqin Guangdong-Macao Deep Cooperation Zone Corporate Income Tax Preferential Catalog (2021 Edition) January 2021 – no end date
Nansha Economic Zone (Guangzhou) Manufacturing in industries including

  • AI and integrated circuits, high-end equipment;
  • Environmental conservation technology, and life and health sciences;
  • Information technology;
  • Advanced manufacturing;
  • Biopharmaceuticals;
  • New energy and new materials; and
  • Etc.
 Nansha Guangzhou Preferential Corporate Income Tax Catalog (2022 Edition) January 1, 2022, to December 31, 2026
Hainan FTP (Hainan) 27 manufacturing fields in the Hainan Free Trade Port Encouraged Industries Catalogue (2020 Edition), including in biomass materials, cosmetics, new energy vehicles, and medical devices.

Manufacturing industries included in the latest editions of the national Guiding Catalogue for Industrial Structure Adjustment and Catalogue of Encouraged Industries for Foreign Investment

 Hainan Free Trade Port Encouraged Industries Catalog (2020 Edition)

 

Guiding Catalog for Industrial Structure Adjustment (2019 Edition)

 

Catalog of Encouraged Industries for Foreign Investment (2022 Edition)

 January 1, 2020 to end 2025 (Hainan Free Trade Port Industries Catalog in effect until December 31, 2024)
Western regions Certain manufacturing industries in the following regions:

  • Chongqing
  • Sichuan
  • Guizhou
  • Yunnan
  • Tibet
  • Shaanxi 
  • Gansu
  • Qinghai 
  • Ningxia 
  • Xinjiang
  • Inner Mongolia
  • Guangxi
 Catalog of Encouraged Industries in the Western Region

 

Guiding Catalog for Industrial Structure Adjustment (2019 Edition)

 

Catalog of Encouraged Industries for Foreign Investment (2022 Edition

 January 1, 2021 to  December 31, 2030
Note: All eligible industries are listed in detail in the respective catalogs.

Note that companies are required to meet certain requirements in order to be eligible for the preferential rate, and these vary from region to region. 

In most cases, companies must be able to prove that they have “substantial operations” in an eligible industry within the development zone itself. For more information on the requirements for substantial operations, see our dedicated article here. 

Preferential policies to encourage innovation 

There are several long-standing preferential policies to boost investment in technological development and upgrading that are applicable to manufacturing companies. 

These include VAT and CIT policies encouraging technology transfer, as well as a pre-tax super deduction for R&D expenses. 

Earlier this year, China extended the R&D super deduction indefinitely. Under the policy, companies can deduct an additional 100 percent of the actual amount of R&D expenses before tax, provided that they do not form intangible assets and are included in the profits and losses of the current period. This in effect means that companies can deduct a total of 200 percent of their R&D expenses before tax, resulting in lower corporate income tax (CIT) payable for a given tax year. 

For more information on this policy, see our dedicated article here.

Policy  Eligible companies  Policy details  Timeline 
VAT exemption for technology transfer, technology development, and related technical consultation and technical services  VAT payers who provide technology transfer and technology development.  VAT exemption for technology transfer, technology development, and related technical consultation and technical services. From May 1, 2016 onward 
CIT reduction and exemptions for qualified technology transfer income  Resident enterprises engaged in technology transfer. Within a given tax year: 

  • CIT is exempted for the part of the resident enterprise’s technology transfer income below RMB 5 million; and 
  • CIT is halved on the part exceeding RMB 5 million. 

China’s standard CIT rate is 25%. 

 From 2015 onward 
Pre-tax super deduction of R&D expenses  Resident enterprises with sound accounting, audit collection, and accurate collection of research and development expenses, except countries in industries on the negative list.
  • For R&D expenses actually incurred in the R&D activities of the enterprise that do not form intangible assets and are included in the current profits and losses, on the basis of actual deduction according to regulations, 100% of the actual amount will be deducted before tax.
  • For R&D expenses that form intangible assets, they shall be amortized before tax at 200% of the cost of the intangible asset. 
 From January 1, 2023 onward 
Tax incentives for encouraging investment in basic research  All companies. 
  • For expenditures contributed by enterprises to non-profit scientific and technological R&D institutions, scientific and technological R&D institutions, institutions of higher education, and government-funded natural science foundations for basic research, such expenditures can be deducted from the taxable income before tax calculation based on the actual incurred amount, and a 100% additional deduction can be applied before tax.
  • Non-profit research institutions and higher education institutions receiving funds for basic research from enterprises, individuals, and other organizations are exempt from corporate income tax. 
 From January 1, 2022 onward 
Tax incentives to encourage equipment upgrades  All manufacturing companies.  1. Manufacturing enterprises in the following industries can opt to either shorten the depreciation period or adopt an accelerated depreciation method for fixed assets acquired after January 1, 2014:  

  • Biopharmaceuticals; 
  • Specialty equipment 
  • Railway, shipbuilding, aerospace, and other transportation equipment  
  • Computer, communication, and other electronic equipment  
  • Instrumentation; and  
  • Information transmission, software, and information technology services 

2. Enterprises in the following industries can either reduce the depreciation period or adopt an accelerated depreciation method for fixed assets acquired after January 1, 2015: 

  • Light industry; 
  • Textiles; 
  • Machinery; and 
  • Automotive. 

3. Starting from January 1, 2019, all manufacturing industries are eligible for the preferential accelerated depreciation of fixed assets. 

  
Note: The above list is not exhaustive. 

Policies to encourage investment 

There are several preferential tax policies in place to encourage investment in innovative companies, including policies aimed specifically at venture capital (VC) firms and their employees. Many of these policies are directed specifically at technology-based startups, as well as foreign investors. 

Among them is an exemption of withholding tax for all non-restricted foreign investment projects and sectors on profits distributed from Chinese resident enterprises to overseas investors for domestic direct investment. 

Policies directed at VC firms include deductions of their investments from their taxable income. For more information on China’s startup environment and preferential policies for VC investment, see our dedicated article here.

Policy  Eligible companies/individuals  Policy details Timeline 
Deferral of withholding tax on equity investment incomes that are re-invested in non-prohibited sectors  Non-resident enterprises  Qualified non-resident enterprises can defer withholding tax as long as they reinvest equity investment incomes, such as dividends and bonuses derived from resident enterprises directly into projects and sectors not prohibited for investment.  From January 1, 2018 onward 
Preferential Tax Policies for Venture Capital (VC)  VC companies  VC enterprises that invest in unlisted small and medium-sized high-tech enterprises through equity investment for a period of two years (24 months) or more, and meet the qualifying criteria, can deduct 70% of the investment amount in the companies from their taxable income in the year when the equity holding reaches 2 years. Any remaining deduction that cannot be utilized in the current year can be carried forward and offset in subsequent tax years.  From 2009 onward 
Deduction of investments in startup technology-based enterprises from taxable income 

 

 Corporate VC enterprises  Enterprises that employ an equity investment approach to directly invest in eligible seed-stage and early-stage technology-based enterprises for a duration of at least 24 months can deduct 70% of the investment amount from their taxable income in the year when the equity holding reaches 24 months. Any remaining deduction that cannot be utilized in the current year can be carried forward and offset in subsequent tax years.  From July 1, 2018 onward 
Deduction of taxable income for angel investors investing in early-stage technology-based enterprises 

 

 

 Angel investors investing in early-stage technology-based enterprises 

 

 

 Angel investors who directly invest through equity investment in eligible early-stage technology-based enterprises for a period of at least two years can deduct 70% of the taxable income obtained from the transfer of equity in those enterprises.  

Any remaining deduction that cannot be utilized in the current period can be carried forward and offset against taxable income obtained from the transfer of equity in the same enterprise in the future. 

 From July 1, 2018 onward 

 
Note: The above list is not exhaustive. 

Identifying and applying China’s preferential tax policies 

China offers myriad preferential policies for companies in various industries. In addition to the policies listed above, the government provides a range of preferential tax policies to help companies attract manufacturing talent and make the transition to green and low-carbon technology and practices.

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China Extends Multiple Tax Incentives for Small Businesses to the End of 2027

Moreover, individual provinces and development areas may implement local tax and fee policies aimed at attracting and growing specific industries. Manufacturing, as one of China’s most important drivers of GDP growth, is frequently the target of local support measures, which may also include preferential treatment other than tax policies. 

Given the variety of policies available, as well as the varying eligibility and application criteria, identifying and assessing eligibility for these tax policies can be difficult. Foreign companies may also wish to assess where preferential policies are available and for how long before entering the China market or expanding to a new area. 

If your business needs assistance assessing which preferential policies it is eligible for, you can consult our tax experts by contacting china@dezshira.com.  

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