China Tax Incentives for Small Businesses

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China is taking a proactive stance to protect and encourage small and micro-level businesses in China with tax incentives to ease financial burdens coming out of the COVID-19 pandemic. This business-friendly ethos is to help these companies get back to normal or survive in the middle of adversity.

But what are these tax incentives and how can they help small businesses? These measures will include corporate income tax (CIT) cuts, individual income tax (IIT) reductions, and value-added income tax (VAT) concessions. The incentives are for small and low-profit enterprises (SLPEs), small business owners, and small-scale taxpayers. Lowering financing costs is the main aim of the incentives.

What are the CIT Incentives for SLPEs?

China has made strides in recent times to enhance its tax policy to include cuts for SLPEs. The cuts are inclusive for small firms that can meet and adhere to these below conditions:

  • Companies whose taxable income is not more than RMB 3 million ($458,500 USD approx.)
  • Firms that have less than 300 employees
  • Businesses whose total assets are not more than RMB 50 million ($7.7m USD approx.)

SLPEs in China of all types can now take advantage of huge corporate income tax (CIT) reductions If an SLPE’s taxable income is around RMB 1 million, the CIT 2.5% will apply to you. If the taxable income is between RMB 1 million and EMB 3 million, the CIT 5% rate will apply.

Here are detailed calculations of the incentives that SLPEs are now subject to:

  • You can get a 20% CIT rate of around 12.5% related to taxable income that is not more than RMB 1 million ($152,800 approx.) that came into place on 1 January 2021 to 31 December 2022; and
  • You can get a 20% CIT rate of around 25% related to taxable income that is more than RMB 1 million but no more than RMB 3 million that comes into place from 1 January 2022 to 31 December 2024.

SLPE evaluations will be applied at the entry-level instead of at the group level. And that will generally cover smaller firms that are subsidiaries of foreign multinational enterprises (MNEs) who are now eligible for benefits and CIT tax cuts in China.

Small-Scale Business VAT Incentives

There are a number of value-added tax (VAT) benefits in China that can be applied to small-scale businesses. These can enjoy increased tax thresholds and VAT levy rate reductions. A small-scale taxpayer is essentially a taxpayer that has taxable VAT sales that are not more than RMB 5 million ($0.77 million approx.)

Some individually owned businesses, unincorporated entities, and even smaller enterprises that do not make any taxable VAT transactions can be treated like small-scale taxpayers instead of general taxpayers. And that’s even if their taxable annual sales are more than the standard.

Surcharges on Education and Other Tax Reduction

There are some other surcharges on education and other tax reduction things to take into consideration. Local education charges across China are worked out by using the actual VAT payment and consumption tax of the taxpayer.

At the time of writing, taxpayers whose sales currently are not greater than RMB 100,000 p/month do not have to pay education surcharges, water conservancy funds, or local education surcharges.

As we stated earlier, VAT thresholds for small-scale taxpayers were lifted on 1 April of this year but will not make any difference to the education surcharge payments unless there is a policy update in the meantime.

On a local level, taxpayers are advised to keep a keen eye on potential and additional tax or fee relief, aside from the education surcharge exemptions.

It’s important to check the local governments and their decisions because they have the authority to reduce levies on six different types of tax and a couple of fees that can reduce the small-scale taxpayer base by around half. These two fees and six tax types are stated below:

  • Resource Tax
  • Urban Maintenance
  • Property Tax
  • Insurance Tax
  • Urban Land Use Tax
  • Arable Land Use Tax
  • Stamp Duty
  • Local Education Surcharge
  • Education Surcharge 

Small Business Owners’ ITT Incentives

Any individually owned businesses, partnership enterprises, or sole partnerships can from 1 January 2022 to 31 December 2022 get individual income tax (IIT) relief and incentives.

You are entitled to a 50% reduction on IIT if you are an individually owned business with a business operation income that is less than RMB 1 million. Any sole proprietorship enterprises, individuals, individually owned businesses or partnership enterprises no longer had to prepay IIT when issuance of cargo transport VAT invoices from 1 April 2021.

Tax Exemptions on Financing Small Businesses

China has also stated that in a bid to help small businesses and micro enterprises raise funds, financial institutions do not have to pay income interest-derived VAT on any small loans given to farmers, individually owned businesses, small enterprises, or micro enterprises. Stamp Duty exemptions are also placed on any loan contracts signed between the financial institutes and small and micro enterprises.