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

China has extended several tax incentives for small businesses till the end of 2027, including CIT, VAT, and access to preferential treatment. We discuss how the incentives apply and key dates.

On August 2, 2023, China’s Ministry of Finance (MOF) and State Taxation Administration (STA) jointly released multiple announcements, extending the preferential tax policies for small businesses to the end of 2027.

The extension follows right after this Monday’s State Council executive meeting, during which the State Council called for an extension of business tax and fee reductions implemented in the past three years.

The extended preferential tax policies include:

• The corporate income tax (CIT) incentives for small and low-profit enterprises (SLPE).
• The value-added tax (VAT) exemptions and reductions for small-scale taxpayers.
• The reduction of “six taxes and two fees” for small-scale taxpayers, SLPEs, and individually owned businesses.
• The individual income tax (IIT) reduction policy for individually owned businesses.
• Preferential tax treatments for small enterprises, micro enterprises, and individually owned businesses to lower financing costs.

Before the extension, all these tax incentives for small businesses were supposed to expire by the end of 2023 or 2024.

In this article, we look into these updated preferential tax policies one by one.

CIT incentive for small and low-profit enterprises

SLPEs refer to enterprises engaged in non-restrictive and non-prohibited businesses that meet the following three conditions:

• Annual taxable income not exceeding RMB 3 million (approx. US$458,500);
• Number of employees not exceeding 300; and
• Total asset value not exceeding RMB 50 million (approx. US$7.7 million).

All types of SLPEs in China can enjoy a reduced CIT rate of 20 percent in combination with a reduction of their tax base. The standard CIT rate is 25 percent.

The reduction of an SLPE’s tax base was progressive before 2023, as follows:

• For the portion of taxable income not exceeding RMB 1 million (approx. US$152,800), 12.5 percent of the taxable income amount will be counted into the tax base.
• For the portion of taxable income more than RMB 1 million but not exceeding RMB 3 million (approx. US$458,500), 25 percent of the taxable income amount will be counted into the tax base.

Find Business Support

Manage Company Tax and Compliance across Multiple Jurisdictions

Previously, as per announcements of the MOF and the STA released in March 2023, the progressive approach of reduced tax base had been simplified to an unified standard. Thus, SLPEs would be subject to a 20 percent CIT rate on 25 percent of their taxable income amount during the period from January 1, 2023, to December 31, 2024, which means the effective CIT rate for SLPEs has been unified to 5 percent.

Now according to the most recent MOF STA Announcement [2023] No.12, this CIT incentive for SLPEs will be effective until December 31, 2027.

The determination of SLPEs shall be based on the annual CIT settlement (or annual CIT reconciliation) result. Newly established enterprises registered as general VAT taxpayers can enjoy this preferential CIT policy before the first annual CIT settlement, if they satisfy the standards sector, number of employees, and total asset value standard of SLPEs.

Because the SLPE evaluation is carried out at the entity level (instead of at the group level), small subsidiaries of foreign multinational enterprises (MNEs) in China can also benefit from these CIT cuts.

VAT incentives for small-scale taxpayers

China offers VAT benefits to small-scale taxpayers, including reduced VAT levy rate and increased VAT threshold.

Here, small-scale taxpayers normally refer to taxpayers whose annual VAT taxable sales do not exceed RMB 5 million (approx. US$0.77 million).

However, unincorporated entities, enterprises, and individually owned businesses that do not often incur VAT-taxable transactions, even if their annual taxable sales exceed the stipulated standard, can choose to be treated as small-scale taxpayers (instead of being registered as general taxpayers).

VAT exemption

Previously, according to an announcement jointly released by the MOF and STA on January 9, 2023, small-scale taxpayers with monthly sales of under RMB 100,000 (approx. US$14,740) shall be exempted from VAT during the period between January 1, 2023 and December 31, 2023.

That is to say, if the monthly sales of the small-scale taxpayer are under RMB 100,000 (approx. US$14,740), or if the quarterly sales are under RMB 300,000 (approx. US$44,220) for small-scale taxpayers who choose one quarter as a tax payment period, the taxpayer will not be subject to VAT.

Now, according to the most recent MOF STA Announcement [2023] No.19, this VAT exemption policy will be effective until December 31, 2027.

Reduced VAT rates

Similarly, according to the same announcement mentioned above, during the period between January 1, 2023, and December 31, 2023, small-scale taxpayers that are subject to a VAT levy rate of 3 percent can enjoy a reduced levy rate of 1 percent. The VAT items that are subject to a 3 percent VAT prepayment rate shall enjoy a reduced prepayment rate of 1 percent.

Now, according to the most recent MOF STA Announcement [2023] No.19, this VAT reduction policy will be effective until December 31, 2027.

Reduction of “six taxes and two fees” for small businesses

Previously, as per the MOF STA Announcement [2022] No.10, small-scale taxpayers, SLPEs, and individually owned businesses could enjoy reduction of “six taxes and two fees” within 50 percent of the tax amount (as decided by provincial governments) before December 31, 2024.

Now, according to the most recent MOF STA Announcement [2023] No.12, the reduction ratio of “six taxes and two fees” for small businesses shall be fixed at 50 percent, rather than a ratio within 50 percent as decided by the provincial government, and this preferential tax policy will be effective until December 31, 2027.

The MOF STA Announcement [2023] No.12 also clarifies that small businesses can still enjoy this 50 percent reduction of “six taxes and two fees” policy even if they have enjoyed other preferential treatment of the “six taxes and two fees” according to law.

IIT incentive for individually owned businesses

Previously, individually owned businesses could enjoy a 50 percent reduction of their payable IIT amount for the portion of taxable income not exceeding RMB 1 million (approx. US$152,800) before December 31, 2024.

Now, according to the most recent MOF STA Announcement [2023] No.12, the ceiling of the taxable income that is eligible for this IIT incentive for individually owned businesses has been raised to RMB 2 million (approx. US$305, 600), and this preferential tax policy will be effective until December 31, 2027.

Tax measures to lower financing costs of small businesses

Find Business Support

Build Your Asia Business with Turnkey Market Entry and Cross-Regional Support

To help small and micro enterprises raise funds, China has been exempting financial institutions from paying VAT on their interest income derived from small loans to small enterprises, micro enterprises, and individually owned businesses. Besides, loan contracts signed between small or micro enterprises and financial institutions are exempt from stamp tax.

Small enterprises and micro enterprises refer to those that comply with the Small and Medium-Sized Enterprises Classification Standard Regulations. (For more details, please refer to our China Briefing Article here)

Small loans refer to loans for small enterprises, micro-enterprises, or individually owned businesses with a bank credit of less than RMB 1 million (including the principal amount). If the small business has no bank credit, the small loans refer to loans of a single business where both the loan contract amount and the loan balance are below RMB 1 million (including the principal amount).

Previously, both measures are effective until December 31, 2023.

Now, according to the most recent MOF STA Announcement [2023] No.13, these preferential VAT and stamp tax policy for lowering financing costs of small businesses will be effective until December 31, 2027.

• Previous Article Beyond a Mega City: Investing in China’s Mega City Clusters – New Dezan Shira & Associates Publication
• Next Article Updates to China’s 2023 Catalogue for Guiding Industry Restructuring