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Incentives for Small and Low-Profit Enterprises

In March, the 2021 Government Work Report proposes to halve the corporate income tax (CIT) liability of small and low-profit enterprises for the portion of taxable income not exceeding RMB 1 million (approx. US$150,000) based on the preferential policies already in force. On April 7, 2021, the STA released the official document, the STA Announcement [2021] No.8, to clarify the policy.

With the new policy in effect, all small and low-profit enterprises can enjoy:

  • a 20 percent CIT rate on 12.5 percent of the taxable income amount for the proportion of taxable income not exceeding RMB 1 million (approx. US$ 152,800) (effective from January 1, 2021 to December 31, 2022).
  • a 20 percent CIT rate on 50 percent of their taxable income amount for the proportion of taxable income of more than RMB 1 million (approx. US$ 152,800) but not exceeding RMB 3 million (approx. US$ 458,500) (effective from January 1, 2019 to December 31, 2021).

As a result, the effective CIT rate for the portion of taxable income not exceeding RMB 1 million for small and low-profit enterprises, will be reduced from five percent to only 2.5 percent.

Small and low-profit enterprises here refers to enterprises engaged in industries that are not prohibited or restricted by the government and meet the following conditions:

  • Annual taxable income not exceeding RMB 3 million;
  • Number of total employees not exceeding 300 persons; and
  • Total assets not exceeding RMB 50 million.

Staff headcount and the amount of the total assets shall be determined in accordance with the enterprise’s quarterly average figure for the year.

Small and low-profit enterprises enjoy a simplified tax filing procedure for eligibility of preferential tax treatment: they only need to fill the relevant sections in the annual CIT return form, without other filing requirements.

Incentives for High-Tech Enterprises

If a taxpayer qualifies as a high-tech enterprise in China, a reduced CIT rate of 15 percent applies. To qualify as a high-tech enterprise, they must meet all of the following criteria:

  • Are registered as a resident enterprise (operating within China, excluding Hong Kong, Macau, and Taiwan) for at least one year;
  • Possess the intellectual property of the enterprise’s core technology which falls within the scope of high-tech fields supported by the state;
  • Maintained R&D and technological advancements which form the main base of its development process;
  • In the last three financial years, R&D expenditure accounted for sales income that adheres to the two conditions:
    • One, in the last year, total income is not less than five percent if latest annual sales income is less than RMB 50 million, not below four percent if latest annual sales income is between RMB 50 million and RMB 200 million, and not below three percent if the latest annual sales income is upwards of RMB 200 million.
    • Two, R&D expenditure within China is not less than 60 percent of the total R&D expenses.
  • The enterprise’s technical personnel engaging in R&D and relevant technological innovation activities constitute more than 10 percent of the total number of employees in the current year;
  • The ratio of income from high-tech related operations against total income is not lower than 60 percent in the current period;
  • The enterprise’s innovation capacity evaluation satisfies the corresponding requirements; and
  • The enterprise has no record of major safety or quality incidents or serious environmental violations during the year preceding the application.

The assessment of a high-tech enterprise is conducted by the Ministry of Science and Technology, the MOF and the SAT based on the relevant regulations.

Starting from January 1, 2018, losses of qualified high-tech enterprises occurred five years before the year in which they become qualified and have not been made up shall be allowed to be carried forward to subsequent years to be made up, and the maximum carry-forward period shall be extended from five years to 10 years. For normal enterprises, the maximum carry-forward period for losses is only five years.

CIT Deductions on R&D Expenditures

In an effort to encourage innovation, the CIT Law stipulates that qualified resident companies in China can enjoy pre-tax additional deductions based on their R&D expenditures. According to Cai Shui [2015] No.119 (Circular 119), the following qualifications should be satisfied to enjoy the additional deductions:

  • The enterprise should have proper accounting;
  • The enterprise should be subject to audit collection;
  • The enterprise should be able to make accurate imputation of R&D expenses; and
  • The enterprise is not engaged in any of the following industries:
    • Tobacco manufacturing;
    • Lodging and catering;
    • Wholesale and retail;
    • Real estate;
    • Leasing and commercial services;
    • Entertainment; and
    • Any other industries stipulated by the MOF and SAT.

Where the R&D expenses incurred by an enterprise in its research and development activities do not form intangible assets and are included in the current period’s profit or loss, on the basis of actual deduction, an additional 50 percent of such R&D expenses could be deducted from the taxable income amount of the year. Where intangible assets are formed, pre-tax amortization shall be made based on 150 percent of the costs of the intangible assets.

During the period of January 1, 2018 to December 31, 2023, the abovementioned two rates were raised to 75 percent and 175 percent, respectively. 

For manufacturing enterprises, the 2021 Government Work Report proposed to further increase the additional pre-tax deduction from 75 percent to 100 percent. The official announcement, the MOF STA Announcement [2021] No.13, was rolled out on March 31.

According to the announcement, effectively January 1, 2021, for R&D expenses actually incurred by manufacturing firms, if they have not formed intangible assets, nor have they not been included into the current profits and losses, such expenses can be additionally deducted before tax at 100 percent of the actual deductions; if they have formed intangible assets, they can be amortized before tax at 200 percent of the actual cost of intangible assets.

The specific scope of R&D expenses includes:

  • Staff and labor expenses, including wages and salaries, basic premiums for pension/medical insurance/unemployment insurance/work injury insurance/maternity insurance, and housing fund of personnel engaging in R&D activities directly, and the service fees of external R&D personnel;
  • Direct costs, including materials, fuels and power expenses directly consumed by R&D activities; development and manufacturing expenses for the mold, technology and equipment used for intermediate testing and product trial, acquisition costs of samples, prototypes and general testing methods which do not constitute fixed assets, and inspection expenses for trial products; operation/adjustment/inspection/maintenance expenses for instruments and equipment used in R&D activities, as well as lease expenses for instruments and equipment rented and used in R&D activities;
  • Depreciation of instruments and equipment used for R&D activities;
  • Amortization of intangible assets, including software, patents and non-patented technologies (i.e. licenses, proprietary technologies, designs, and formulae) used in R&D activities;
  • Design fees for new products, fees for formulation of new processes, clinical trial fees for new drugs, and onsite testing fees for exploration and development technologies;
  • Other expenses directly related to R&D activities, such as technical books and materials expenses, material translation expenses, expert fees, insurance premiums for research and development of advanced technologies, expenses for search, analysis, evaluation, demonstration, identification, assessment and acceptance of research and development results, application fees, registration fees and agent fees for intellectual property, business trip expenses, and conference expenses (The total amount of these expenses shall not exceed 10 percent of the total amount of R&D expenses allowed for additional deduction); and
  • Any other expenses stipulated by the MOF and the SAT.

The additional deduction for R&D expenses shall not apply to the following activities:

  • Conventional upgrades of the enterprise’s products (services);
  • Direct application of certain technologic research results, such as direct adoption of openly available new technologies, materials, devices, products, services, or knowledge;
  • Technical support activities provided by the enterprise to its customers following commercialization;
  • Repetitive or simple changes to existing products, services, technologies, materials, or processes.
  • Market surveys, efficiency surveys, or management studies;
  • Quality control, testing and analysis, repair and maintenance in industry (service) process or in regular basis; and
  • Research in social sciences, arts or humanities.

For R&D activities outsourced to an external organization or individual entrusted by the enterprise, 80 percent of the actual amount shall be included in the entrusting party’s R&D expenses and allowed for additional deduction.

Where the entrusted organizations or individuals are overseas parties, 80 percent of the actual R&D expenses amount may be itemized as the entrusting party’s commissioned overseas R&D expenses. The commissioned overseas R&D expenses, to the extent of two-thirds of the domestic R&D expenses that meet the given conditions, are eligible for the pre-tax additional deduction.

Other General Incentives

As provided below, other projects are also entitled to CIT preferential policies. Investors should consult tax professionals in China for information on the most up-to-date tax incentives available to them.

  • CIT incentives for hiring disabled employees - An additional 100 percent deduction of salaries paid to disabled employees on the basis of actual deduction.
  • Tax reduction for enterprises investing in west China - Qualified enterprises making investments to encouraged industries in the west China region can enjoy a reduced CIT rate of 15 percent before December 31, 2030 upon approval by the relevant tax office. The western region includes, but is not limited to, Chongqing Municipality, Sichuan Province, Yunnan Province, Guizhou Province, Shanxi Province, and Ningxia Province.
  • Income derived from eligible technology transfers - Income as obtained by a resident enterprise through transferring eligible technology could be exempted from CIT for the part not exceeding RMB 5 million, and the excess shall be subject to 50 percent CIT reduction.
  • Tax reduction for enterprises investing in seed-stage or start-up technology enterprises - Qualified enterprises making investment to seed-stage or start-up technology enterprises in pilot cities--Beijing, Tianjin, Hebei, Shanghai, Guangdong, Anhui, Sichuan, Wuhan, Xi’an, Shenyang and Suzhou Industrial Zone, can deduct 70 percent of the investment amount from the taxable income from January 1, 2017. Investments made two years prior to the effective date could also apply this benefit. This incentive has been expanded nationwide since January 1, 2018.
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