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Tax incentives are preferential tax policies offered by the government to incentivize  or encourage a particular economic activity or to support disadvantaged business owners or individuals. From the investor’s perspective, tax incentives are legitimate tools for reasonable tax planning and cost savings. Also, it is a useful indicator of market trends and government priorities.

Since China’s reform and opening up began in the late 1970s, the country has implemented a series of preferential tax policies, in turn attracting a large number of foreign capital and foreign-invested enterprises and effectively promoted the adjustment and optimization of various industrial structures.

What Kind of Tax Incentives Does China Have?

There are multiple forms of tax incentives available to businesses in China, such as tax exemptions, tax reductions, lower tax rates, tax refunds or rebates, tax credits, etc. As it is not possible to exhaustively cover the subject in one article, we have categorized the tax incentives and focused on prominent examples.

Based on the type of tax

Currently China has 18 different types of taxes for individuals and businesses, some of whom are eligible for more incentives than others on tax obligations like corporate income tax (CIT), value-added tax (VAT), and individual income tax (IIT).

Here we take CIT as an example.

According to the latest Catalogue for Administration of Preferential CIT Policies released by the State Taxation Administration (STA) in 2018, there are in total 69 different CIT incentives that are available to enterprises. These include CIT exemption on certain type of incomes, such as dividends, bonuses, and other equity investment income between qualified resident enterprises; CIT reductions on certain incomes, such as income derived from eligible technology transfer; additional pre-tax deduction of certain expenses, such as research and development (R&D) expenses; tax credits for certain costs, such as the investment in seed-stage or start-up technology enterprises; lower CIT rates (the standard CIT rate is 25 percent) for certain types of enterprises, such as  high- tech companies or enterprises in certain regions, such as companies engaging in encouraged sectors in China’s western areas; and accelerated depreciation or one-time deduction of the value of fixed assets.

Similarly, there are preferential tax policies under VAT, IIT, and other type of taxes. Enterprises can examine if there are any tax incentives available by reviewing the taxes one by one.

Based on the size of businesses

Since smaller businesses may be at a disadvantage in competitive markets due to limited capital and human resources, the government tends to provide tax incentives to support their development and help them survive and thrive during difficult times, such as under the ongoing COVID-19 pandemic.

For example, small and low profit enterprises, as per the latest policy, can enjoy:

  • January 1, 2020 to December 31 2022: 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) (i.e.,effective tax rate at 2.5 percent).
  • January 1, 2022 to December 31, 2024: 20 percent CIT rate on 25 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) (i.e., effective tax rate at 5 percent).

Here, small and low-profit enterprises refer to enterprises engaged in industries that are not prohibited or restricted by the government and reporting an annual taxable income not exceeding RMB 3 million (approx. US$458,500), number of total employees not exceeding 300 persons, and total assets not exceeding RMB 50 million (approx. US$7.7 million).

To be noted, China also provides other tax incentives to “small- and medium- sized enterprises” and “small-scale VAT taxpayers”, both of which are subject to different standards. Enterprises are suggested to carefully study the qualifications to see if they apply.

Based on sectors

China also provides sector-wise tax incentives for specific purposes, such as to guide industrial upgrade, to support the development of the sector, or to respond to the special characteristics of the sector.

For example, to bolster its semiconductor industry, China has rolled out a wide range of favorable policies for the integrated circuit (IC) and software industries. Among others, multiple preferential CIT incentives have been granted to encouraged IC production enterprises and projects based on the line width of the product and the expected operation period of the enterprises (e.g. qualifying IC production enterprises or projects that employ IC line width of no more than 28 nanometers (nm) and with an operation period of more than 15 years will be exempt from CIT for as many as 10 years.) Enterprises engaging in IC design, IC equipment, IC materials, IC packaging, and IC testing, and qualified software enterprises are also eligible for certain level of CIT incentives, starting from the first profit making year of the enterprises. In addition, preferential VAT and import duty policies are available for the IC and software industries, too.

[video file='https://cdn.jwplayer.com/videos/ryxNFQx0-sZcHHUE7.mp4' image='https://resource.dezshira.com/resize/900x506/Misc/banners/web_2.jpg' title='China’s Tax Incentives for Enterprises in 2022 - Updates Following the Two Sessions']

Other sector-based tax incentives include preferential VAT incentives for the animation industry; higher advertisement and promotion expenditure cap of pretax deduction for enterprises manufacturing or selling cosmetics, enterprises manufacturing pharmaceuticals, and enterprises manufacturing beverages (excluding alcohol); preferential import tax policies for the new-type display industry; VAT exemption and preferential CIT policy for qualified enterprises in energy conservation service industry; and additional input VAT deduction for manufacturing services and the life service industry (cultural and sport services, educational and medical services, tourism and entertainment services, catering and accommodation services, daily residents’ services, etc.), etc.

Based on regions

Besides industrial and location advantages, policy s another decisive consideration when assessing the competitiveness of a region. Thus, China provides region-based tax incentives to encourage investments in certain less attractive areas or to give comparative advantages to more economic zones. One thing to be noted here is that region-based tax incentives are usually connected to the industrial ecosystem.

For example, enterprises will pay a lower CIT rate of 15 percent if they make investments in encouraged industries in China’s western regions from January 1, 2021 to December 31, 2030. The encouraged industries here refer to those listed in the Catalogue of Industries Encouraged to Develop in the Western Region.

As for tax incentives provided in economic zones, examples include the 15 percent CIT rate for enterprises engaged in encouraged industries in Lingang New Area of the Shanghai FTZ, in Shenzhen’s Qianhai Area, in Pingtan Area of Fujian FTZ, and in Hainan Free Trade Port (FTP); each zone maintains their own respective standards and catalogues for assessing which industries qualify as encouraged industries.

Besides preferential CIT policies, other noticeable region-based tax incentives in specific regions are the IIT refund policy provided in the Guangdong-Hong Kong- Macao Greater Bay Area (GBA) and the Hainan FTP for the portion of IIT paid that exceeds 15 percent of the taxable income, although the policy details and application procedures are different in each region.

In addition, preferential VAT and import duties are implemented in certain regions.

Do foreign funded companies have equitable access to tax incentives?

Prior to 2008, under the Corporate Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises, China actually granted more preferential tax policies to foreign invested enterprises (FIEs) in order to attract investment.

For example, FIEs were taxed on their corporate income at a rate of 15 percent, far less than the 33 percent CIT rate for domestic companies at that time. Also, qualified FIEs can enjoy a "2+3 years tax holiday" or even “5+5 years tax holiday”, meaning that they shall be exempted from CIT in the first two or five years, respectively, and are allowed a 50 percent reduction in the following three or five years, respectively, from the year they begin to make profit.

Since 2013, with the five-year transitional period of the Corporate Income Tax Law of the People's Republic of China coming to an end, the tax policies for FIEs and domestic companies were consolidated and special preferential tax policies for FIEs were cancelled at the state level.

Now, FIEs and domestic companies can generally apply for tax incentives equally, based on their qualifications, although local governments can offer certain tax incentives at their discretion to attract foreign investment.

How to enjoy tax incentives in China?

China has simplified the procedures to enjoy tax incentives. For most preferential tax policies, taxpayers can self-assess if they are qualified to access the incentives and apply them when making the tax payment (that is, the time of pre-payment or final settlement, depending on the specific incentive) – without seeking approval from the local tax bureau.

However, this does not mean taxpayers can enjoy tax incentives at will, either. For one, taxpayers must retain relevant documents for potential inspection from the tax bureaus. Second, some of the required documents may involve a special application and approval process with relevant government bureaus, such as those for high-tech enterprises and IC and software enterprises. To gain eligibility for IIT refunds in certain regions also require taxpayers to apply to relevant tax bureaus.

[tips title="Did You Know"]Enterprises are suggested to pay close attention to the administrative measures in addition to the qualifications for enjoying tax incentives.[/tips]

Income Tax Incentives for Developing Talent

IIT subsidies for overseas high-end talents and urgently needed talents

From the start of 2019 to the end of 2023, eligible overseas talents working in nine cities of Guangdong province – Guangzhou, Shenzhen, Zhuhai, Huizhou, Zhaoqing, Jiangmen, Dongguan, and Foshan – are able to apply for individual income tax (IIT) subsidies because of a talent policy for the Guangdong-Hong Kong-Macao Greater Bay Area.

The subsidies will be calculated based on the taxable individual income sub-items separately and will then be distributed on a lump-sum basis next year. Thus, the calculation formula of subsidy amount can be extended as:

The subsidy amount =∑ [(the amount of IIT paid in sub-items in nine cities in 2019 – taxable income in sub-items × 15%)]

The taxable income includes the following sub-items:

  • Comprehensive income, including:
    – Income from wages and salaries;
    – Income from labor compensation;
    – Remuneration income; and
    – Income from royalties;
  • Operating income; and
  • Subsidized income from selected talent programs or talent projects.

Overseas talents working in the above-mentioned nine cities and paying taxes as required by law in the local city are eligible for the subsidy. They may be:

  • Permanent residents of Hong Kong or Macau;
  • Hong Kong residents who came to Hong Kong through the Hong Kong entry scheme for talents, professionals, and entrepreneurs;
  • Residents of Taiwan;
  • Foreign nationalities; or
  • Overseas students and overseas Chinese who have obtained the right of long-term residence abroad.

Applicants shall also fit the definition of “high-end” and “urgently needed” talents and meet the income condition and contract condition, set out by the municipal governments.

Preferential IIT policies for talents in Hainan FTP

According to Cai Shui [2020] No.32, for high-end talents and talents in short supply working at Hainan FTP, the portion of their actual IIT burden exceeding 15 percent will be exempted.

The following types of income sourced from Hainan FTP will be eligible:

  • Comprehensive income, such as wages and salaries, remuneration for labor services, author’s remuneration, and income from royalties;
  • Operation income; and
  • Talent subsidy income recognized by Hainan Province.

Eligible Hainan talents still need to pay IIT according to China’s general IIT rate in the current year first. When the final settlement is made during March 1 to May 31 of the next year, the Hainan tax bureau will refund the portion of the IIT that exceeds 15 percent of the actual taxable income.

A list of professions that qualify as high-end talent and talent in short supply who can enjoy the aforesaid preferential policies and specific administrative measures will be formulated by Hainan Province in consultation with the MOF and the STA. various financial incentives at the provincial, municipal, district, and development zone levels

Various individual income tax incentives, subsidies, and rewards may be offered to talents working at special zones, such as Lingang New Area of Shanghai Free Trade Zone, Suzhou Industrial park, etc. Talents may consult with the local authorities or professionals to ensure whether they can be eligible to enjoy these preferential policies.

Preferential IIT policies for talents in Zhuhai Hengqin

Zhuhai Hengqin (Guangdong-Macao ICZ) plans a policy similar to the IIT incentives implemented at the nine Guangdong cities in GBA as well as in Hainan FTP. Overseas and domestic high-end talents and shortly needed talents working in the ICZ may be exempt from paying the portion of income tax that exceeds 15 percent of their taxable income. Moreover, Macao residents working in the ICZ may apply Macao’s IIT rates.

Preferential IIT policies for talents in Beijing and Shanghai

Eligible overseas high-end talents working in certain areas of Beijing will be able to enjoy preferential IIT policy, according to the State Council. The detailed implementation measures are yet to be announced.

Shanghai Lingang New Area also grants financial subsidies for foreign high-end and shortly needed talents, which can lower their effective IIT rate to 15 percent. According to some public reports, the area has started implementing the relevant IIT measures, although the detailed implementation rules are not public.

[faq title="FAQs: IIT Subsidy Application in the Greater Bay Area" ui="accordion"]

What is the talent policy for the Guangdong-Hong Kong-Macao Greater Bay Area (GBA)?

A talent policy for the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) has enabled eligible overseas talents working in any of the nine cities in Guangdong province to apply for individual income tax (IIT) subsidies, from the start of 2019 to the end of 2023. During the period from July 1 to September 30, 2021, all nine cities successively opened and closed their IIT subsidy application process. Successful applicants will get subsidies equal to the portion of the IIT paid in the GBA city in excess of 15 percent of the taxpayer’s taxable income for 2020. This article lists some commonly asked questions about the IIT subsidy application process, updated for 2021, and provides answers based on our on-the-ground experience.

As of the end of September 2021, nine cities in Guangdong province – Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen, and Zhaoqing – have completed accepting applications from overseas ‘high-end’ and ‘urgently-needed’ talent to secure individual income tax (IIT) subsidies for the year 2020.

Dezan Shira & Associates’ Greater Bay Area offices have been providing advisory services regarding this policy and assisting talents and their employers in preparing the requisite materials, submitting applications, and coordinating with local government departments.

As this incentive will remain in effect for the next three years — the IIT subsidy applications for the year 2023 will be submitted in 2024 — we would like to share some frequently asked questions and our comments in a bid to help future applicants succeed in obtaining the IIT subsidies. As the detailed rules might be slightly different from city to city, below we take Shenzhen as an example to demonstrate.

I am a foreign national and have been working in Shenzhen since the end of 2018. If I missed my IIT subsidy application for the year 2020, can I apply next year?

According to the current policy, taxpayers will not get a second chance to apply for the IIT subsidy if they missed the application deadline. Eligible expatriates are advised to apply for the IIT subsidy before the deadline as stipulated in each GBA city’s government announcement.

Is there any difference between the GBA IIT subsidy application for the year 2019 and 2020 in Shenzhen?

There are quite a few differences. While handling the GBA IIT subsidy application for the year 2020, we found that the government review is stricter than the previous year — the applicants were asked to supplement various documents to prove their eligibility.

Besides, the government has begun paying more attention to the social insurance contributions of the applicants. Though social insurance participation in 2020 is not a mandatory requirement for the GBA IIT subsidy application for the year 2020, applicants who hadn’t participated in social insurance schemes must begin participating immediately before they can proceed with the application.

Another noteworthy change is that there is no request for applicants’ taxable income (exceeding RMB 500,000) anymore. This enables more expats to access the benefits brought by this policy.

What should I pay attention to for next year’s GBA IIT subsidy application in Shenzhen?

First, applicants must submit the application before the application deadline of the corresponding GBA city, which is usually stipulated in the government announcement on the GBA IIT subsidy application for the year.

Secondly, as we have gleaned from this year’s application and our communication with authorities in charge, the requirement on social insurance enrollment and contribution is likely to become stricter for future GBA IIT subsidy applications. We suggest expats who intend to apply for the GBA IIT subsidy in the following years to participate and contribute to social insurance as required by law, in case the government makes this mandatory in order to qualify for the application.

Last but not least, please make sure that the personal information input into the tax system is completely consistent with other records that are involved in the application procedure, such as the data from the bank and the local social insurance bureau. We have come across a case where the application was hindered because the name registered with the bank was formatted in a different order from the name registered in the tax system. Although the problem was resolved in this instance, we suggest applicants pay attention to the accuracy of the information in advance considering the application time is limited.

I am a Hong Kong citizen living in Shenzhen. Are there any special changes for me to the GBA IIT subsidy application process for the year 2020?

The GBA governments classify talents into two categories: ‘urgently needed talent’ and ‘high-end talent’.

For Hong Kong citizens who want to apply as ‘urgently needed talent’, a big change is that the applicants have to be employed by ‘qualified companies in order to be eligible. ‘Qualified companies’ are those that are included in lists provided by different government departments. Those who are qualified as ‘high-end talent’ are not affected by this new change. Being a ‘High-end talent’ means that either you possess a qualified talent card, you are a candidate of qualified talent projects, or you are recognized by the state, provincial, or municipal government

Can I use my overseas bank account to receive the GBA IIT subsidy from the government or do I need to open a Chinese bank account?

Only a Chinese bank account is able to receive the subsidy from the Chinese government. Please also make sure that the beneficiary’s name on the bank account is the same as the taxpayer’s name registered with the tax bureau.

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Tax Incentives Offered in Specific Sectors

CIT incentives for integrated circuit enterprises and software enterprises

On August 4, 2020, China’s State Council released the Policies of Promoting High-quality Development of Integrated Circuit Industry and Software Industry (Guo Fa [2020] No.8).

The document lays out a wide range of policies to shore up the development of the integrated circuit (IC) and software industries, applying to all companies registered in China, regardless of nationality.

Under the new policy, qualifying IC production enterprises or projects that employ integrated circuit line width of no more than 28 nanometers (nm) and have operated for more than 15 years will be exempt from CIT for as many as 10 years.

For encouraged IC manufacturing enterprises or projects with integrated circuit line width that is no more than 65 nm and operation period of over 15 years, they can enjoy CIT exemption for the first five years, and a half-rate tax deduction of the 25 percent CIT deduction (that is, 12.5 percent) in the subsequent five years.

For encouraged IC manufacturing enterprises or projects with integrated circuit line width no more than 130 nm and operation period of over 10 years, they can enjoy tax exemption for the first two years and a half-rate tax reduction (that is, 12.5 percent) in the following three years.

In addition, where an encouraged IC manufacturing enterprise that employs integrated circuit line width that is no more than 130 nanometers incurs a loss in a tax year, the enterprise is allowed to carry the loss forward to subsequent years, provided the loss carried forward does not exceed 10 years (note: for normal enterprises, the loss carried forward generally cannot exceed five years).

The abovementioned tax incentives count starting from the first profit making year for the IC enterprise, or the first business revenue collection year for the IC project.

The list of encouraged IC manufacturing enterprises or projects will be drawn up by the National Development and Reform Commission (NDRC) and the Ministry of Industry and Information Technology (MIIT), together with other relevant authorities.

For encouraged enterprises engaging in IC design, IC equipment, IC materials, IC packaging, and IC testing as well as software enterprises – they can enjoy tax exemption for the first two years and a half-rate tax reduction (12.5 percent) in the following three years, starting from the first profit making year of the enterprise.

The qualification of encouraged IC design, equipment, materials, packaging, and testing enterprises will be drawn up by the MIIT together with other relevant authorities.

Key IC enterprises and software enterprises can enjoy tax exemption for the first five years and a reduced 10 percent CIT rate in the following years, starting from the first profit making year of the enterprise. The list of key encouraged IC enterprises and software enterprises will be drawn up by the NDRC, MIIT, together with other relevant authorities.

CIT incentives for income derived from eligible environmental protection, energy saving, or water conservation projects

The income an enterprise obtains by undertaking eligible projects, such as public sewage treatment, public garbage treatment, comprehensive development and utilization of biogas, technological transformation for energy saving and reduced emissions and desalination, etc., will be exempted from CIT for the first three years as of the taxable year when the revenue arising from production or operation is first obtained, and taxed at a half rate from the fourth to the sixth year.

CIT incentives for enterprises making investments in or operating of public infrastructure projects specially supported by the state

Income obtained from projects in respect to ports, wharves, airports, railways, roads, urban public transportation, electric power, and water conservancy listed in the Catalogue of Public Infrastructure Projects Entitled to CIT Preferential Policy will be exempted from CIT for the first three years as of the taxable year when the revenue arising from production or operation is first obtained, and taxed at a half rate from the fourth to the sixth year.

CIT incentives for enterprises engaging in other sectors

  • Tax incentives for enterprises engaging in pollution control - Qualified resident enterprises engaging in pollution control can enjoy a reduced CIT rate of 15 percent, during the period between January 1, 2019 and December 31, 2021.
  • Income derived from planting of flowers, tea, and other beverage plants and spiceberries, and income derived from mariculture and inland aquaculture shall be subject to 50 percent CIT reduction.
  • Income derived from the following projects could be exempted from CIT:
    • Planting of vegetables, corn, potatoes, oil plants, beans, cotton, hemp, sugar plants, fruit, and nuts;
    • Breeding of new varieties of crops;
    • Planting of traditional Chinese medicinal herbs;
    • Cultivation and planting of woods;
    • Raising of livestock and poultry;
    • Gathering of forest products;
    • Agricultural, forestry, husbandry, and fishery service projects such as irrigation, primary processing of agricultural products, veterinarian, promotion of agricultural technology, operations, repair and maintenance of agricultural machinery etc.; and
    • Ocean fishing.

Tax Incentives to Encourage Technology Innovation

As China endeavors to shift from being a low-end mass manufacturer to a high-end producer, the government has doubled down on encouraging targeted investments in research and development (R&D) and technological innovation. The ongoing technology confrontation with the US is another factor at play, impacting a wide range of segments from access to chips and other key input technologies and products. This has resulted in China labeling its technology sector as a strategic one and for which government support has increased.

High and new technology enterprises (HNTEs)

HNTE treatment, which reduces a qualified taxpayer’s applicable corporate income tax (CIT) rate from the standard 25 percent to 15 percent, is one of China’s core tax incentives that encourage innovation.

Besides the lower CIT rate, starting from January 1, 2018, an additional preferential tax treatment has been granted to HNTE:

  • Losses of qualified HNTE that occur five years prior to 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 is up to 10 years. For normal enterprises, the maximum carry-forward period for losses is only five years.

Upon obtaining the qualification as an HNTE, the enterprise shall enjoy the HNTE treatment starting from the year when the HNTE certificate is issued.

Qualification and criteria

To qualify for HNTE status, a company must meet all of the following criteria:

  • Be registered in China (not including Hong Kong, Macao, and Taiwan) for at least one years.
  • Owns the intellectual property (IP) right for the core technology of its key products or services (services ) through independent R&D, transfer, donation, merger and acquisition, etc.
  • The core technology of the enterprise’s key products (services) falls within the scope of the areas outlined in the Regions of Advanced Technologies Strongly Supported by the State, which covers more than 200 categories of technologies, products, and services in eight large technological areas.
  • 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.
  • In the last three financial years (the actual operational period for newly established ones), R&D expenditure should account for a certain percentage of the enterprise’s total sales revenue in the same period:
    1. No less than five percent if the latest annual sales revenue is below RMB 50 million (inclusive, approx. US$7.7 million);
    2. No less than four percent if the latest annual sales revenue is below between RMB 50 million (approx. US$7.7 million) and RMB 200 million (inclusive, approx. US$30.8 million); and
    3.  No less than three percent if the latest annual sales income is upwards of RMB 200 million (approx. US$30.8 million).

R&D expenditure within China is not less than 60 percent of the total R&D expenses.

  • 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.
  • The enterprise has no record of major safety or quality incidents or serious environmental violations during the year preceding the application.

Technology-based small- and medium-sized enterprises (TSMEs)

A TSME falls under the scope of SMEs that conduct technology-based activities, which consists of scientific and technological personnel who are involved in R&D activities and obtain IP for creating high-tech products or services.

Being qualified as a TSME, the losses of the enterprise 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 is up to 10 years. Besides, local governments may treat TSMEs as HNTE candidates and provide other incentives to support their growth.

According to the 2022 Government Work Report released on March 5,2022, during the 2022 Two Sessions, the additional R&D expenses deduction ratio of TSMEs will be raised from 75 percent to 100 percent. More details are expected to be released in the coming months.

Different from the HNTE qualification, the TSME status has special requirements on enterprises’ number of total employees, annual sales revenue amount, and total assets. On the other hand, the HNTE requires that the core technology of the enterprise’s key products (or services) is specially encouraged by the state and the ratio of income from high-tech related operations against total income is not lower than 60 percent in the current period, while TSME has no such requirements. In general, it is easier to apply for the TSME status for smaller businesses.

Qualification and criteria

 A ATSE shall meet all the following requirements:

  • Be registered in China (excluding Hong Kong, Macao, and Taiwan).
  • The total number of its employees shall be no more than 500, and either its annual sales income or its total asset amount shall be no more than RMB 200 million (approx. US$30.8 million).
  • The products and services provided by it are not included in the prohibited, restricted, or eliminated categories prescribed by the State.
  • There is no occurrence of major safety or major quality accidents and serious violation of environmental law or serious dishonesty in scientific research in the previous year of filling and the present year, and it is not included in the list of enterprises with abnormal operations or the list of enterprises with serious dishonest behaviors in violations of the law.
  • Its comprehensive evaluation score is not less than 60 points in terms of the evaluation indicators for TSMEs, with the score on scientific and technical staff indicator more than 0 point.

The evaluation indicators for TSMEs, to be specific, include such categories as scientific and technical staff, R&D investment, as well as scientific and technological achievement, with a total score of 100.

Certain enterprises could be exempted from the scoring requirements, including:

  • Enterprise that holds an HNTE certificate that has not expired yet.
  • Enterprise that has won a state-level science and technology award within the past five years and ranked in the top three.
  • Enterprise that has a recognized R&D body at provincial or ministerial level or above.
  • Enterprise has taken the lead in the development of international standards, national standards, or industry standards within the past five years.

Advanced technology service enterprises (ATSEs)

In addition to HNTE and TSME, ATSE status is another core innovation tax policy in China to encourage the provision of information technology outsourcing (ITO), business process outsourcing (BPO), or knowledge process outsourcing (KPO) services to overseas entities.

Originally launched in the Suzhou Industrial Park in 2016, the ATSE incentive was rolled out nationwide in 2017, reducing the CIT rate for a qualified ATSE from the standard 25 percent to 15 percent, similar to the HNTE treatment.

Besides, ATSEs are subject to zero value added tax (VAT) rate for the provision of certain offshore services, which means they can be exempted from the corresponding VAT payment where the simple tax computation method is applicable, or they can enjoy the tax exemption, credit, and refund method where VAT general tax computation method is applicable.

Previously, the ATSEs also had the privilege to deduct employee education expenses that do not exceed eight percent of the said enterprise’s total salaries from the taxable income of the CIT, and the part exceeding eight percent could be carried forward to subsequent years. However, since January 1, 2018, this policy has been made available to all enterprises unless stipulated otherwise.

Qualification and criteria

 To be qualified as a ATSE, an enterprise must fulfill all the following requirements:

  • Be registered in China (excluding Hong Kong, Macao, and Taiwan).
  • Be engaged in one or more categories of advanced technology service businesses listed in the Scopes of Recognized Advanced Technology Service Businesses (for Trial Implementation, hereinafter, the Scope) and adopt advanced technologies or has strong research and development capabilities.
  • More than 50 percent of its staff hold a college degree or above.
  • More than 50 percent of its total revenue at the current year come from the revenue generated from the advanced technology service businesses listed in the Scope.
  • Revenue generated from offshore service outsourcing business is not less than 35 percent of total revenue at the current year.

“Revenue generated from offshore service outsourcing business” refers to the revenue generated by an enterprise from overseas entities by providing the ITO, BPO, KPO services specified in the Scope for the overseas entities by the enterprise itself or by other enterprises directly subcontracted by the enterprise under the entrustment contract signed between the enterprise and the overseas entities.

Super deduction on R&D expenditure

In an effort to encourage innovation, beyond the lower CIT rates and loss carry-forward policy introduced above, China also allows for the super deduction of the enterprise’s R&D expenses.

When calculating the CIT taxable income, while the cost is usually 100 percent deductible and the expenses, such as employee education expenses and advertising expenses, are subject to a deduction cap, the expense actually incurred by an enterprise in R&D activities enjoys the below preferential policies:

  • For manufacturing enterprises (except tobacco manufacturing), starting from January 1, 2021, if the R&D expenses do not form intangible assets and are included in the current profits and losses, on the basis of actual deduction, an additional 100 percent of such R&D expenses could be deducted from the taxable income amount; if the R&D expenses have formed intangible assets, they can be amortized before CIT at 200 percent of the actual cost of intangible assets.
  • For TSMEs, starting from January 1, 2022, if the R&D expenses do not form intangible assets and are included in the current profits and losses, on the basis of actual deduction, an additional 100 percent of such R&D expenses could be deducted from the taxable income amount; if the R&D expenses have formed intangible assets, they can be amortized before CIT at 200 percent of the actual cost of intangible assets.
  • For other enterprises (except tobacco manufacturing, lodging and catering, wholesale and retail, real estate, leasing and commercial services, and entertainment), during the period between January 1, 2018 and December 31, 2023, if the R&D expenses do not form intangible assets and are included into the current profits and losses, on the basis of actual deduction, an additional 75 percent of such R&D expenses could be deducted from the taxable income amount; if the R&D expenses have formed intangible assets, they can be amortized before CIT at 175 percent of the actual cost of intangible assets.

Manufacturing enterprises are enterprises whose main business is in the manufacturing industry and whose main business income accounts for more than 50 percent of the total income in the year of enjoying preferential treatment.

For expenses incurred in R&D activities entrusted by enterprises to external institutions or individuals within China, 80 percent of the actual amount shall be included in the entrusting party’s R&D expenses and allowed for the additional deduction, and the entrusting party shall not make further additional deduction.

For expenses incurred in R&D activities entrusted by enterprises to external institutions (exclude individuals) outside China, 80 percent of the actual expenses shall 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, are eligible for the pre-tax additional deduction.

To be noted, R&D activities here refer to processes where an enterprise applies new science and technology knowledge creatively for the purpose of obtaining new science and technology knowledge or carried out systematic activities with specific goals continuously for substantive improvement of technologies, product (services), and processes. Non-creative activities, such as conventional upgrades of the enterprise’s products, are not regarded as eligible for the R&D super deduction policy. The State Taxation Administration also has detailed guidance on the scope of the R&D expenses.

Similar to other CIT preferential policies, to enjoy the R&D expenses super deduction policy, enterprises can enjoy the incentive when making tax payment (at the time of pre-payment or final settlement) by self-evaluating if they are qualified and retain relevant documents for future potential inspection of the tax bureau for 10 years. To be noted, R&D activities entrusted to overseas institutions are subject to additional documentation requirements.

Summary

Besides the major innovation tax policies introduced above, there are other preferential tax policies to encourage the development of the tech sector, such as the tax incentives to the integrated circuit and software sector, the timelier refund of the VAT incremental credit balance to advanced manufacturing taxpayers, etc.

As such incentives can reduce the enterprise’s tax burden to a large extent, potentially qualified enterprises are suggested to carefully study the application requirements of each incentive and choose the one or more that are most preferential and suitable to their own situation. For example, for an enterprise that doesn’t own local IP rights of the key technologies representing the enterprise’s core products or services, the ATSE status is more suitable for it than the HNTE status, as the latter involves local IP requirement.

Businesses in China may find its documentation requirements and application procedures burdensome if they are not familiar with the established tax system and eligibility criteria for accessing supportive measures. Seeking professional assistance might be the best choice. To learn more about how to get the most out of China’s preferential tax policies, please contact tax@dezshira.com.

Tax Incentives Offered in Specific Regions of China

China has been introducing different tax incentive schemes in certain regions. Some regions, such as the Hainan Free Trade Port (FTP) and the Guangdong-Hong Kong-Macao Greater Bay Area (GBA), are part of the country’s economic development strategy, where tax incentives are there to help achieve ambitious development goals. Other regions are encouraged due to their lack of geographical and legacy industrial advantages and need policy support to lure investments for economic development like the vast western regions.

CIT cuts in Western China

Until December 31, 2030, enterprises set up in China’s western regions with their main businesses in encouraged industries of the specific region can enjoy a reduced corporate income tax (CIT) rate of 15 percent, according to MOF SAT NDRC Announcement [2020] No.23.

The western regions are Inner Mongolia, Ningxia, Shaanxi, Gansu, Chongqing, Sichuan, Guizhou, Guangxi, Yunnan, Qinghai, Tibet, and Xinjiang. Some underprivileged cities in other provinces – Xiangxi, Enshi, Yanbian, and Ganzhou – may also adopt the same CIT preferential policy.

To be eligible, the enterprise’s main business must fit into the encouraged category of the relevant industry catalogues. And its main business revenue must account for at least 60 percent of its total business revenue.

Xinjiang

To especially support the economic development of Xinjiang in Western China, a “2+3 years tax holiday” policy is available for enterprises setting up in Xinjiang’s underprivileged areas and a “5 years tax holiday” can be availed by those established in Kashgar and Khorgos.

From January 1, 2021 to December 31, 2030, enterprises set up in Xinjiang’s underprivileged areas whose main business is in encouraged industries can enjoy CIT exemption for the first two years (starting from the first income-generating year), and a halved CIT rate (that is, 12.5 percent) in the subsequent three years, according to Cai Shui [2021] No.27. Those set up in special economic development zones of Kashgar and Khorgos can be straightly exempt from CIT for five years (starting from the first income-generating year).

Chinese Regions Offering Reduced CIT Rate of 15% for Encouraged Businesses

CIT rate

Region

 

Effective period

15%

Western regions

 

2021.1.1-2030.12.31

Hainan FTP

 

2020.1.1-2024.12.31 (“positive list” management phase)

2025-2035 (“negative list” management phase)

Special economic zones

Shanghai Lingang

2020.1.1 (no specific expiration date)

Shenzhen Qianhai

2021.1.1-2025.12.31

Fujian Pingtan

2021.1.1-2025.12.31

Zhuhai Hengqin

To be announced

Tax incentives in Hainan FTP

China is currently putting great effort to transform Hainan island into a world-leading free trade port. To attract businesses and talents, the government has introduced a series of innovative tax relief measures. Businesses may find them very attractive when contemplating their Hainan operations.

CIT incentives in Hainan FTP

Enterprises registered in Hainan Free Trade Port get the chance to enjoy the following CIT relaxations, according to Cai Shui [2020] No.31.

CIT rate reduction

Enterprises that (a) are registered in Hainan FTP, (b) have “substantive operations” in Hainan, and (c) with their main business in the encouraged industries in Hainan are entitled to CIT at a reduced rate of 15 percent from January 1, 2020 to December 31, 2024. Likewise, to qualify, the enterprise’s main business must be in the encouraged industries of Hainan, and the income from the enterprise’s main business must constitute 60 percent or more of its total income.

What’s more, during the period from 2025 to 2035, the applicable scope of the lowered CIT rate of 15 percent will be expanded to benefit all Hainan enterprises (only except those in a “negative list” sector), according to the Overall Plan for the Construction of Hainan FTP released by the State Council.

CIT exemption on overseas direct investment income

Enterprises of tourism, modern service, and high-tech sectors registered in Hainan FTP are exempt from paying CIT on income from new overseas direct investment between January 1, 2020 and December 31, 2024.

The tax exemption applies to (a) income from operating profits from newly established overseas branches and (b) dividend income that is a result of new direct investment obtained from overseas subsidiaries in which the Hainan enterprise holds a 20 percent or more equity. Plus, to enjoy the tax exemption, the foreign jurisdiction, where the overseas branch is located or investment is made, must impose a statutory income tax of five percent or more.

Accelerated tax deductions for eligible capital expenditures

Furthermore, Hainan-registered enterprises are allowed to accelerate the pre-tax deduction of the cost of fixed assets (excluding building) or intangible assets that are acquired between January 1, 2020 and December 31, 2024.

  • For assets with a unit value no more than RMB 5 million (approx. US$0.77 million), a one-off pre-tax deduction is allowed; and
  • For assets with a unit value of more than RMB 5 million (approx. US$0.77 million), accelerated depreciation or amortization is allowed.

This tax treatment in Hainan FTP is quite similar to that provided in Cai Shui [2018] No.54. However, Hainan’s accelerated depreciation/ amortization regime for eligible capital expenditure is more relaxed because the Cai Shui [2018] No.54 (which is applicable nationwide) does not cover intangible assets, but Hainan’s policy covers fixed assets (including those self-constructed and self-developed) and intangible assets. Plus, Cai Shui [2018] No.54 contains more restrictions on fixed assets with a unit value of more than RMB 5 million (approx. US$0.77 million).

CIT and IIT reduction for venture capital enterprises

According to the 2021 Guidelines for Venture Capital in Hainan FTP, for venture capital enterprises that are established in Hainan and meet the requirements:

  • 70 percent of the investment in small and medium-sized high-tech enterprises and start-up technology enterprises can be deducted from its taxable income; and
  • A reduced CIT rate of 15 percent can be enjoyed for income from industries encouraged by Hainan FTP.

Moreover, qualified employees of venture capital enterprises may be exempt from paying IIT on the portion that exceeds 15 percent of their taxable incomes gained in Hainan FTP, including comprehensive incomes, business incomes, and talent subsidy income recognized by Hainan Province.

IIT incentives

According to Cai Shui [2020] No.32, qualified high-end and urgently needed talents working at Hainan FTP can enjoy a partial individual income tax (IIT) exemption. That is, the portion of the IIT exceeding 15 percent of their taxable income can be exempt during the period from January 1, 2020 to December 31, 2024.

This talent policy is modeled after the one implemented in Guangdong-Hong Kong-Macao Greater Bay Area (GBA).

However, Hainan even has more IIT relaxation after 2024. From 2025 to 2035, Hainan FTP will limit the IIT brackets on comprehensive income and business income to 3%, 10%, and 15% percent (the normal tax brackets are: 3%, 10%, 20%, 25%, 30%, 35%, and 45% for comprehensive income; and 5%, 10%, 20%, 30%, and 35% for business income) for certain individuals residing in Hainan. To qualify, the individual must reside in Hainan for no less than 183 days a year.

Import duty exemption

Encouraged industrial enterprises producing goods originating from Hainan that do not contain imported materials or contain imported materials but with added value exceeding 30 percent after processing of imported intermediary products in Hainan are exempt from import tariffs when entering the rest of China.

Tax incentives in Guangdong-Hong Kong-Macao GBA

IIT incentives

In GBA, foreign high-end talents and urgently needed talents working at the nine mainland cities – namely GuangzhouShenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen, and Zhaoqing – can apply for a financial subsidy to lower their IIT burdens from January 1, 2019 to December 31, 2023. The subsidy amounts to the portion of the IIT paid by the qualified talent that exceeds 15 percent of one’s taxable income, according to Cai Shui [2019] No.31.

IIT Incentives – Hainan vs GBA

Preferential IIT Rates in Specific Regions of China

Area

Hainan FTP

Nine GBA cities

IIT rate

Comprehensive income, business income, and talent subsidy income recognized by the Hainan government

Comprehensive income, business income, and subsidy income from selected talent programs and talent projects

15% (2020.1.1-2024.12.31)

15% (2019.1.1-2023.12.31)

3%, 10%, 15% (2025-2035)

-

Scope of eligible talents

Before 2025: eligible foreign and domestic high-end talents and talents in short supply.

Before 2035: eligible individuals who reside in Hainan FTP for more than 183 days in a tax year.

Eligible overseas talents high-end talents and talents in short supply.

Application process

No need to apply. The portion of the IIT that exceeds 15% of the taxable income paid last year will be refunded to the talent after annual final settlement of IIT.

Need to apply during a specific period each year. The portion of the IIT that exceeds 15% of the taxable income paid last year will be returned to the talent as a subsidy after the application is made.

* In addition to Hainan FTP and GBA, Shanghai Lingang New Area, Guangdong-Macao ICZ (Zhuhai Hengqin), and certain areas in

Beijing also implement or will implement similar IIT incentives. Detailed implementation rules are yet to be announced.

Basically, the IIT incentives in Hainan FTP and in GBA both aim to lower the actual income tax burden of qualified talents to 15 percent of their taxable income. Besides, in both policies, taxable income refers to the individual’s comprehensive income, business income, and recognized subsidy income (investment or asset transfer income is not covered).

However, there are also some differences. First, Hainan’s IIT policy applies to both foreign and domestic talents, while GBA’s IIT incentive is only applicable to foreign talents (including residents of Hong Kong, Macao, and Taiwan).

[video file='https://cdn.jwplayer.com/videos/9TJwzpMu-sZcHHUE7.mp4' image='https://resource.dezshira.com/resize/900x506/Misc/banners/web_1.jpg' title='Tax Incentives in China - How Businesses Can Successfully Utilize Them']

Second, eligibility criteria for Hainan’s IIT incentives considers social security contributions, proof of labor relationship, minimum annual income (for “high-end talents”), and the talent catalogue (for “talents in short supply”). However, in the GBA, qualification criteria vary from city to city. In addition to the basic requirements, foreign talents also need to satisfy additional criteria in their city (such as the city’s catalogues of high-end talents and talents in short supply, the minimum working days/annual income requirements, etc.).

Further, to enjoy the IIT relief, GBA talents need to file applications during a specific period each year. The excess portion of the IIT paid last year will be returned to the talent this year as a subsidy after the application is successful. However, Hainan provides a more streamlined process. Overpaid tax can be refunded to the talent immediately after the talent completes the annual final settlement of IIT

Notably, some other special economic zones, including Lingang New Area of Shanghai Free Trade Zone (FTZ), Guangdong-Macao Intensive Cooperation Zone (also known as Zhuhai Hengqin area), and Hunan FTZ Changsha Area adopt similar IIT policies.

VAT incentives

To support import and export business, the GBA has introduced value-added tax (VAT) exemption policy for some insurance companies as well as tax refund policy at port of departure.

VAT exemption for insurance enterprises

From October 1, 2020 to December 31, 2023, income of insurance premium for international shipping derived by insurance enterprises registered in Guangzhou from enterprises registered in Nansha Area of Guangdong FTZ will be exempt from VAT, according to Cai Shui [2020] No.48.

Export tax rebates

From October 1, 2020, containerized cargos to be shipped abroad from the designated 37 ports of shipment and passing through Nansha Bonded Port of Guangzhou and Qianhai Bonded Port of Shenzhen (the place of departure) by qualified export enterprises with qualified transportation enterprises as the carriers, will be eligible for the export tax rebate policy at the port of the shipment.

Tax incentives in Shanghai Lingang New Area

Some of China’s special economic zones like free trade zones (FTZs) also offer competitive tax incentives for companies.

CIT incentives

Starting January 1, 2020, enterprises registered in Lingang New Area of Shanghai FTZ may be eligible for a lowered CIT rate of 15 percent for five years since its date of establishment, according to Cai Shui [2020] No.38.

To qualify, the enterprise’s main business must be in four key industries – integrated circuits (IC), artificial intelligence (AI), biomedicine, and civil aviation. And it must engage in substantive production and R&D activities in a sector listed in the Catalogue of Key Fields and Core Links of Lingang New Area.

IIT incentives

Lingang also grants financial subsidies for foreign high-end and shortly needed talents, which can lower their effective IIT rate to 15 percent. According to some public reports, the area has started implementing the relevant IIT measures, although the detailed implementation rules are not public.

VAT incentives

From January 1, 2021 to December 31, 2024, enterprises registered in Yangshan Special Comprehensive Bonded Zone (CBZ) of Lingang New Area are exempt from VAT on income derived from providing transportation services, handling services, and warehouse services within the zone, according to Cai Shui [2021] No.3.

Tax incentives in Shenzhen Qianhai

CIT incentives

According to Cai Shui [2021] No.30, from January 1, 2021 to December 31, 2025, qualified enterprises engaged in encouraged business activities in Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone are able to enjoy a reduced CIT rate of 15 percent.

Shenzhen Qianhai encourages businesses in 30 sectors under five broad industry categories – modern logistics, information services, technology services, cultural and creative industries, and commercial services.

Tax Incentives in Fujian Pingtan

CIT incentives

According to Cai Shui [2021] No.29, from January 1, 2021 to December 31, 2025, qualified enterprises engaged in encouraged business activities in Pingtan Comprehensive Experiment Zone of Fujian FTZ are entitled to the reduced 15 percent CIT rate.

Fujian Pingtan currently encourages 146 Industry sectors under five categories – high-tech, consumer services, agricultural and marine industry, ecological and environmental protection, infrastructure management, and tourism.

Tax Incentives in Zhuhai Hengqin (Guangdong-Macao ICZ)

In September, the State Council rolled out a masterplan for the construction of Guangdong-Macao Intensive Cooperation Zone (ICZ), which contains a series of favorable tax policies. Businesses may find many of them similar to those implemented at Hainan FTP.

CIT incentives

Eligible enterprises registered in the Cooperation Zone will be entitled to a reduced CIT rate of 15 percent on their business income. Also, CIT will be exempt on the newly added earnings from overseas direct investment into the tourism, modern services, and high technology businesses set up in the Cooperation Zone.

Further, capital expenditure of businesses that meets the criteria will be allowed a one-off deduction before tax for the taxation period in which the expenditure occurred or accelerated depreciation and amortization.

IIT incentives

The ICZ also plans a policy similar to the IIT incentives implemented at the nine Guangdong cities in GBA as well as in Hainan FTP.

Overseas and domestic high-end talents and shortly needed talents working in the ICZ may be exempt from paying the portion of income tax that exceeds 15 percent of their taxable income. Moreover, Macao residents working in the CIZ may apply Macao’s IIT rates.

Beijing IIT incentives

Eligible overseas high-end talents working in certain areas of Beijing will be able to enjoy preferential IIT policy, according to the State Council. The detailed implementation measures are yet to be announced.

Tax incentives in Beijing Zhongguancun

CIT exemption on income from qualified technology transfer

Resident enterprises registered in Beijing Zhongguancun National Independent Innovation Demonstration Zone are exempt from CIT on income derived from qualified technology transfer not exceeding RMB 20 million (approx. US$3.1 million), according to Cai Shui [2020] No.61. In addition, CIT on income from qualified technology transfer exceeding RMB 20 million (approx. US$3.1 million) can be halved.

This tax treatment shares similarities with the STA Announcement [2015] No.82, which allows resident enterprises nationwide to enjoy CIT cuts on income from qualified technology transfer. However, the STA Announcement [2015] No.82 has a smaller tax-free limit of RMB 5 million (approx. US$0.77 million) and stricter definition of qualified technology transfer.

CIT reduction for venture capital enterprises

Furthermore, according to Cai Shui [2020] No.63, effective from January 1, 2020, for qualified corporate venture capital enterprises (CVCE) in the Demonstration Zone:

  • If the gains on the transfer of equity, which has been held for not less than three years, exceeds 50 percent of the total gains on the transfer of equity in a given tax year, a 50 percent exemption for CIT based on the shareholding ratio of individual shareholders at year-end is allowed (CIT Exemption = Shareholding ratio of individual shareholders at year-end x CIT liability for year ÷ 2); and
  • If the gains on the transfer of equity, which has been held for not less than five years, exceeds 50 percent of the total gains on the transfer of equity that year, a 100 percent exemption for CIT based on the shareholding ratio of individual shareholders at year-end is allowed (CIT Exemption = Shareholding ratio of individual shareholders at year-end x CIT liability for year).

China’s special economic zones are all over the country, each with special support measures for businesses. Due to the limited space of this article, we cannot enumerate them all here. You are welcome to contact our business intelligence consultants and tax experts at China@dezshira.com for detailed business and policy information in a specific region.

Tax Incentives for Small Businesses

China is actively creating a friendly environment conducive to the growth of small businesses, taking measures to ease the financial burdens and solve financing difficulties for small and micro firms. During the COVID-19 pandemic, these measures have been further enhanced to help affected firms weather the storm.

We introduce the major tax incentives for small businesses, including corporate income tax (CIT) cuts for small and low-profit enterprises (SLPEs), individual income tax (IIT) reduction for small business owners, as well as concessions on value-added tax (VAT) and other taxes and fees for small-scale taxpayers and tax measures to lower financing costs of small and micro enterprises.

What are China’s tax incentives for small businesses?

CIT incentives for small and low-profit enterprises

China has recently enhanced its inclusive tax cut policy 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 are able to enjoy a reduced corporate income tax (CIT) rate of 20 percent in combination with a reduction of their tax base.

Specifically, SLPEs are subject to:

  • 20 percent CIT rate on 12.5 percent of the taxable income amount for the portion of taxable income not exceeding RMB 1 million (approx. US$152,800) (effective from Jan. 1, 2021-Dec. 31, 2022); and
  • 20 percent CIT rate on 25 percent of their taxable income amount for the portion of taxable income more than RMB 1 million but not exceeding RMB 3 million (effective from Jan. 1, 2022-Dec. 31, 2024)

As a result, for an SLPE’s taxable income amount up to RMB 1 million, an effective 2.5 percent CIT rate applies; for the portion of taxable income between RMB 1 million and RMB 3 million, an effective 5 percent CIT rate applies.

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.

Corporate Income Tax Cuts for Small And Low-Profit Enterprises

Annual taxable income(ATI)

Tax base

CIT rate

Effective CIT rate

Effective period

The portion below RMB 1 million

ATI*12.5%

20%

2.5%

2021.1.1-2022.12.31

The portion between RMB 1 million and RMB 3 million

ATI*25%

5%

2022.1.1-2024.12.31

VAT incentives for small-scale taxpayers

China offers value-added tax (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

On March 24, 2022, the Ministry of Finance and the State Taxation Administration released a new announcement clarifying issues related to VAT exemption for small-scale VAT taxpayers. Accordingly, from April 1, 2022 to December 31, 2022, small-scale VAT taxpayers that are subject to a VAT levy rate of 3 percent will be exempted from VAT payment or prepayment.

Reduced VAT rates

Since the first COVID-19 outbreak in Wuhan city, China exempted small-scale taxpayers in Hubei province from paying VAT and reduced VAT for small-scale taxpayers in the other regions.

From April 1, 2021 to December 31, 2021, all small-scale VAT taxpayers (both in Hubei or outside Hubei) that are subject to a VAT levy rate of 3 percent can pay VAT at the reduced levy rate of 1 percent. They may also prepay VAT at the reduced pre-levy rate of 1 percent for items subject to a pre-levy rate of 3 percent. This incentive was extended to March 31, 2022 as per the latest announcement.

Increased VAT threshold

China also raised the VAT exemption threshold for small-scale VAT taxpayers from April 1, 2021 to December 31, 2022. The VAT threshold for small-scale taxpayers has been lifted to RMB 150,000 (approx. US$23,240) per month (or RMB 450,000 per quarter, approx. US$69,700) from the previous RMB 100,000 (approx. US$15,200) per month (or RMB 300,000 per quarter, approx. US$45,800).

In other words, if the monthly sales amount of the small-scale taxpayer is under RMB 150,000 (or the quarterly sales amount is under RMB 450,000 for taxpayers who choose one quarter as a tax payment period), the taxpayer will not be subject to VAT.

There is one situation where the taxpayer with monthly sales of over RMB 150,000 can still be exempt from VAT. That is when the taxpayer occasionally occurs real estate transactions that month. Some small-scale taxpayers have the obligation to pre-pay VAT tax. The policy has clarified that if their monthly sales in the place where the VAT needs to be pre-paid do not exceed RMB 150,000, they are not required to pre-pay VAT.

The state tax authority has clarified that if a small-scale taxpayer with total monthly sales of more than RMB 150,000, but after deducting the sales of real estate, other sales (i.e., the sales of goods, labor, services, and intangible assets) do not exceed RMB 150,000, the small-scale taxpayer can still be exempt from VAT.

VAT Liability Threshold for Small-Scale Taxpayers

Monthly sales amount

Quarterly sale amount

Effective period

RMB 100,000

RMB 300,000

2021.1.1-2021.3.31

RMB 150,000

RMB 450,000

2021.4.1-2022.12.31

Education surcharge and other tax reduction

China’s national and local education surcharges are calculated based on a taxpayer’s actual payment of VAT and consumption tax.

At present taxpayers whose sales amount does not exceed RMB 100,000 per month (or RMB 300,000 per quarter) will be exempt from education surcharge, local education surcharge, and water conservancy construction fund.

As mentioned above, since April 1 this year, the VAT threshold for small-scale taxpayers has been lifted to RMB 150,000/month (or RMB 450,000/quarter). However, taxpayers should note that the new VAT threshold will not affect the payment of education surcharge unless the relevant policy is updated.

Aside from the exemption of education surcharges, taxpayers can keep an eye on additional tax and fee relief offered locally.

Local governments are granted authority to reduce levying of six types of taxes and two fees on small-scale taxpayers within the tax base of 50 percent. The six taxes and two fees refer to resource tax, urban maintenance and construction tax, property tax, urban land use tax, stamp duty (excluding stamp duty on securities transactions), arable land use tax, education surcharge, and local education surcharge.

IIT incentives for small business owners

From January 1, 2021 to December 31, 2022, during which period individually owned businesses, sole proprietorships, and partnership enterprises can enjoy some individual income tax (IIT) relief.

For the portion of an individually owned business’ income from a business operation that does not exceed RMB 1 million, the business is entitled to a 50 percent reduction of IIT on the basis of the prevailing incentives.

From April 1, 2021, individually owned businesses, sole proprietorship enterprises, partnership enterprises, and individuals will no longer be required to pre-pay IIT at the time of issuance of cargo transport VAT invoices on behalf.

Tax measures to lower financing costs of small businesses

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

Both measures are effective until December 31, 2023.

China’s VAT Rebates Policy in 2022

In the face of growing economic pressure from COVD-19 containment measures, high operational costs, and global logistics and macroeconomic turmoil, China has released a slate of tax relief measures to ease the burden on small businesses and companies in key industries.

Specifically, the government has pledged around RMB 1.5 trillion (approx. US$ 238 billion) of large-scale tax rebates on VAT credit over the course of 2022. To increase the efficiency and effectiveness of the rebates, the government also issued directives to speed up the payment of refunds for certain businesses.

Foreign businesses and their subsidiaries that fall under the categories of eligible companies eligible can apply for a full refund of incremental VAT credit on a monthly basis and a one-off refund of their remaining VAT credit accordingly.

Note: For the purpose of this section, VAT rebates and VAT credit refunds are mutually used to refer to the VAT relief provided in China.

Background

What are VAT rebates?

VAT, or value-added tax, is one of the major indirect taxes levied in China. Rates range from six to 13 percent for general VAT taxpayers. VAT credit is the overpaid input VAT at the end of each taxable period when the input VAT exceeds the output VAT.

Previously, the period-end uncredited VAT was not refundable in the current taxable period but could be carried forward to and be deducted in the next taxable period. Since April 2019, when China began deepening VAT reform, qualified taxpayers in all industries were allowed to apply for uncredited VAT refunds in the current taxable period. Starting in June 2019, qualified taxpayers in the advanced manufacturing industry were able to enjoy a similar but more relaxed policy.

Now, the VAT credit refund policy will be applied even more broadly. The full refund of incremental VAT credit on a monthly basis, which was previously only available to companies in the advanced manufacturing industry, is now available to micro and small firms in all industries and qualified enterprises in another twelve industries.

Moreover, qualified enterprises will enjoy a one-off refund of their remaining VAT credit in turn following a decided calendar.

Expansion of VAT rebates in 2022

In the 2022 Government Work Report released on March 5, the government announced that an estimated RMB 2.5 trillion would be handed out in tax rebates and cuts in 2022, of which RMB 1.5 trillion would be earmarked for tax rebates specifically. All of these funds would go directly to eligible companies, the report stated.

The government provided more details on the arrangements for the tax cuts and rebates during a weekly State Council meeting chaired by Premier Li Keqiang on March 21. According to a readout of the meeting, RMB 1 trillion of the funds will be provided as VAT refunds to micro and small enterprises (MSEs) and sole proprietorships in all industries.

The VAT relief is a key measure for stabilizing development, stabilizing market entities, and ensuring employment and also serves to conserve tax sources and improve the VAT system, according to the readout.

In addition to MSEs and sole proprietorships, the remaining tax credits for eligible companies of all sizes in certain industries will be refunded in full between July 1 and the end of the year.

On March 22, 2021, the Ministry of Finance (MOF) released an announcement [Announcement (2022) No. 14] that provided more details on the expansion of the VAT credit refunds for MSEs and qualified companies in six specific industries, clarifying the eligibility criteria for companies, how to assess the number of VAT credits that can be refunded and other definitions.

On April 17, 2022, the MOF released another announcement [Announcement (2022) No. 17] calling for tax offices to speed up the refund of VAT for micro, small, and medium-sized enterprises (MSMEs).

On May 17, 2022, the MOF released another announcement [Announcement (2022) No. 19] calling for tax offices to speed up the refund of VAT for large enterprises.

On June 7, the MOF and STA issued another notice [Announcement (2022) No. 21], further expanding the scope of companies eligible for VAT credit refunds to include those in an additional seven industries.

Who can apply for VAT rebates?

Generally, qualified micro and small firms in all industries and all qualified enterprises in 13 industries can apply for VAT rebates.

What are micro and small firms?

Micro, small, medium, and large companies are specific legal designations in China, as stipulated in regulatory documents, such as the Small and Medium-Sized Enterprises Classification Standard Regulations.

The specific parameters for company size depend on the industry in which the company is operating. Below are some of the size parameters for various industries. Note that large companies are defined as companies with operating income, assets, and staff numbers above the designated threshold for medium-sized companies in each industry.

Company Size Classification by Industry

Sector

Micro

Small

Medium

Industry (including mining, manufacturing, electricity, heat, gas, and water production and supply)

–        Fewer than 20 employees; or

–        Operating income of less than RMB 3 million

–        20 employees or more; and

–        Operating income of RMB 3 million or more

–        Between 300 and 1,000 employees; and

–        Operating income of between  RMB 20 million and RMB 400 million.

Construction

–        Operating income of less than RMB 3 million; or

–        Total assets of less than RMB 3 million

–        Operating income of RMB 3 million and above; and

–        Total assets of RMB 3 million and above

–        Operating income of between RMB 60 million and RMB 800 million; and

–        Total assets between RMB 50 million and RMB 800 million.

Retail

–        Fewer than 10 employees; or

–        Operating income of less than RMB 1 million

–        10 or more employees; and

–        Operating income of RMB 1 million or more

–        Between 50 and 300 employees; and

–        Operating income of between RMB 5 million and RMB 200 million

Transport and logistics

–        Fewer than 20 employees; or

–        Operating income of less than RMB 2 million

–        20 employees or more; and

–        Operating income of RMB 2 million or more

–        Between 300 and 1,000 employees; and

–        Operating income of between RMB 30 million and RMB 300 million

Catering

–        Fewer than 10 employees; or

–        Operating income with less than RMB 1 million

–        10 or more employees; and

–        Operating income of RMB 1 million or more

–        Between 100 and 300 employees; and

–        Operating income of between RMB 20 million and RMB 100 million

Information transmission

–        Fewer than 10 employees; or

–        Operating income of less than RMB 1 million

–        10 or more employees; and

–        Operating income of RMB 1 million or more

–        Between 100 and 2,000 employees; and

–        Operating income of between RMB 10 million and RMB 1 billion

Software and information technology

–        Fewer than 10 employees; or

–        Operating income of below RMB 500,000

–        10 or more employees; and

–        Operating income of RMB 500,000 or more

–        Between 100 and 300 employees; and

–        Operating income of between RMB 10 million and RMB 100 million

Real estate

–        Operating income of below RMB 1 million; or

–        Total assets below RMB 20 million

–        Operating income of RMB 1 million and above; and

–        Total assets of RMB 20 million

–        Operating income of between RMB 10 million and RMB 2 billion above; and

–        Total assets of between RMB 50 million and RMB 100 million.

Source: Small and Medium-Sized Enterprises Classification Standard Regulations

Note: The above list is not exhaustive.

Total assets are determined according to the taxpayer’s end-of-year value in the previous fiscal year. Operating income is determined according to the taxpayer’s VAT sales in the previous fiscal year. If the duration of VAT sales amounts to less than one fiscal year, it is calculated according to the following formula:

VAT sales (year) = VAT sales during the actual duration of the enterprise in the previous fiscal year / number of months of the actual duration of the enterprise × 12

The STA announcement released on June 7, 2022 also further clarified that the industry that an MSE belongs to is determined by looking at which industry accounted for the company’s highest proportion of its total VAT sales in the previous fiscal year. The industry is determined as per the definition in the Industrial Classification for National Economic Activities (PDF) (link in Chinese). This requirement is effective as of June 7, 2022. 

Which industries are eligible for VAT rebates?

As stipulated in the STA Announcement (2022) No. 14 released on March 22, 2022, the VAT rebate policy has been extended to include all eligible companies in the following six industries: 

  • Manufacturing 
  • Scientific R&D and technology services 
  • Electricity, heating, gas, and water production and supply
  • Software and information technology services 
  • Ecological protection and environmental governance 
  • Transport, logistics, warehousing, and postal 

The STA Announcement (2022) No. 21 released on June 7, 2022, further expanded this policy to cover companies in an additional seven industries, which are: 

  • Wholesale and retail 
  • Agriculture, forestry, animal husbandry, and fishery 
  • Hospitality and catering 
  • Residence, repairs, and other services 
  • Education 
  • Healthcare and social work 
  • Culture, sports, and entertainment 

To qualify for VAT rebates, VAT sales related to one of the 13 industries listed above must account for over 50 percent of the company’s total VAT sales. The 13 industries are determined per the legal definition in the Industrial Classification for National Economic Activities.

The proportion of VAT sales is calculated and determined based on the company’s sales for 12 consecutive months before applying for the refund. If the company has been operating for less than 12 months but more than three months prior to applying for the refund, then the VAT sales are calculated and determined based on the sales during the actual operating period.

Which companies are “qualified”?

Qualified enterprises refer to companies that meet all of the following criteria:

  • Have an A or B tax credit rating.
  • Have not fraudulently obtained tax refunds for remaining credits, fraudulently obtained export tax refunds, or falsely issued special VAT invoices in the 36 months prior to the application.
  • Have not been punished twice or more by the tax authority for tax evasion within 36 months of applying for the tax refund.
  • Have not enjoyed the preferential policy of “refund upon payment and return (refund) after payment” since April 1, 2019.

All MSEs and companies in the 13 industries must meet the above criteria to qualify for the VAT credit rebates.

Timeline for applying for VAT rebates

Micro, small enterprises, and sole proprietorships

Qualified MSEs can apply to the competent tax authority for a refund of incremental tax credits on a monthly basis starting from the tax filing period in April 2022.

The timeline for application of the one-time refund of the remaining tax credit is as follows:

  • From the tax filing period in April 2022, eligible micro-enterprises could apply for a one-time refund of the remaining tax credits to the competent tax authority.
  • From the tax filing period in May 2022, eligible small enterprises can apply for a one-time refund of the remaining tax credits to the competent tax authority.

The MOF announcement released on March 21 stated that VAT refunds for MSEs should be paid by April 30 and June 30 respectively, on the basis of voluntary applications by the companies.

Companies in the 13 industries

Companies in the 12 industries listed above are eligible for a full refund of incremental VAT credits on a monthly basis as well as a one-time refund of the remaining tax credits.

Starting from the tax filing period in April 2022, enterprises in the first list of six industries can apply for refunds of incremental tax credits to the competent tax authority.

Moreover, medium and large enterprises in these six industries can also apply for a one-time refund of the remaining tax credits (micro and small in the six industries are also eligible for this by default under the conditions for MSEs described above). The timeline for application is as follows:

  • Starting from the tax filing period in May 2022, qualified medium-sized enterprises in the six industries can apply to the competent tax authority for a one-time refund of the remaining tax credits.
  • From the tax declaration period in June 2022, qualified large enterprises in the six industries can apply for a one-time refund of the remaining tax credit to the competent tax authority.

According to the April 17, 2022 announcement and the May 17, 2022 announcement of the MOF, the remaining tax credits will be refunded to medium-sized and large enterprises in the first list of six industries before June 30, 2022, on the basis of a voluntary application by taxpayers.

Meanwhile, companies in the second list of seven industries can apply for both the refund of incremental VAT credits and one-time refund of remaining VAT credits from July 1, 2022. The announcement did not specify a deadline for the refund of VAT credits for companies in these seven industries. 

How is the VAT rebate amount calculated?

Defining incremental and remaining VAT credit

The MOF announcement released on March 22, 2022, clarified that both incremental input VAT credit and the remaining VAT credits can be refunded under the scheme.

The incremental VAT credit is determined by distinguishing between the two following situations:

  • Before a taxpayer obtains a one-time refund of the remaining VAT credit, the incremental VAT credit is the newly increased tax credit at the end of the current period compared with March 31, 2019.
  • After the taxpayer obtains a one-off tax refund for the remaining VAT credit, the incremental tax credit shall be the end-of-period tax credit.

The remaining VAT credit is determined according to the following circumstances:

  • Before a taxpayer obtains a one-time refund of the remaining VAT credit, if the amount of VAT credit retained at the end of the current period is more or equal to the amount of tax credit retained at the end of March 31, 2019, the amount of the remaining VAT credit is the same as the amount of VAT credit retained at the end of March 31, 2019;
  • If the amount of VAT credit retained at the end of the current period is less than the amount of tax credit retained at the end of March 31, 2019, then the amount of remaining VAT credit is the same as the amount of tax credit retained at the end of the current period.
  • After the taxpayer obtains a one-off tax refund for the remaining VAT credit, the remaining VAT credit will be zero.

Calculating VAT credit amount

To calculate the amount of VAT credits that can be refunded, companies can follow the following formula:

Incremental tax credits allowed to be refunded = incremental tax credits × input VAT ratio × 100%

Remaining tax credits allowed to be refunded = remaining tax credits × input VAT ratio × 100%

Input VAT ratio refers to the ratio of VAT amount indicated on relevant VAT invoices (or fapiao) which have been credited from April 2019 up until the tax period prior to the application for tax refund, to the total credited input VAT in the same period. Relevant VAT invoices here include:

  • Special VAT invoices (including fully digitized electronic invoices with the words “special VAT invoices” and unified tax-controlled motor vehicle sales invoices)
  • General electronic invoices for toll road VAT
  • Customs Import VAT Special Payment Note
  • Receipts of tax payment certificate

According to STA Announcement [2022] No. 4, when calculating the input VAT ratio, the input VAT transferred out by a taxpayer – as required from April 2019 up until the tax period before the application for tax refund is filed – does not need to be deducted from the VAT amount indicated on any relevant VAT invoices that have been deducted.

How to apply for VAT refunds

To apply for a VAT refund, companies must first complete the filing and payment of VAT for the current period before they can apply for the VAT return. To apply, companies must submit the Tax Refund (Credit) Application Form (PDF) (link in Chinese) through the Electronic Taxation Bureau (link in Chinese) or to the Tax Service Office.

Taxpayers that have already taken advantage of the preferential policy of “refund upon payment and return (refund) after payment” since April 2019 can still apply for a refund of the remaining VAT credits – if they first return the previously refunded VAT. The full amount must be repaid before October 31, 2022. This can be done by submitting the Application Form for the Return of Excess Input VAT Credits through the Electronic Taxation Bureau (link in Chinese) or to the Tax Service Office.

The other side of the coin: Intensifying the crackdown on tax fraud

While China substantially expands and accelerates the implementation of the VAT rebate policy, it is also stepping up the crackdown on fraudulent and criminal behavior.

From April 1 to May 10, 2022, the public security and tax authorities have launched investigations into more than 1,800 enterprises suspected of defrauding tax refunds and confirmed that 448 enterprises have obtained tax refunds illegally or fraudulently, involving RMB 822 million in tax refunds. 74 cases of fraudulent tax refunds have been publicly exposed.

On May 17, 2022, the STA and other five regulators jointly released the Circular on Severely Cracking Down on Illegal and Criminal Acts of Defrauding Value-added Tax (VAT) Credit Refunds, which further demonstrates China’s determination in combating fraud in VAT rebate procedures.

In cases where a company has fraudulently obtained the remaining tax refund by falsely increasing items, making false declarations, or other deceptive means, the tax authority will recover the fraudulently obtained tax refund, and deal with it in accordance with the Law of the People’s Republic of China on the Administration of Tax Collection, the Administrative Penalty Law of the People’s Republic of China, and other relevant regulations.

Although the laws do not stipulate a specific punishment or fine for VAT credit refund fraud, typical cases released by the STA show that companies found to have engaged in fraudulent behavior to obtain VAT refunds have been recommended fines of up to two times the total amount of tax fraudulently obtained.

It is therefore extremely important that companies adhere to China’s tax laws and follow application guidelines closely to ensure that they do not increase the amount of input VAT on the application, whether on purpose or by accident.

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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