Benefits of the preferential tax policy for Small & Medium Enterprises (SMEs) in China
As the Chinese government looks to reactivate the economy and
avoid unemployment, a wide range of new preferential individual and
corporate tax incentives have been approved and implemented since
January 1, 2019 to bolster Small and Medium Enterprises’ (SMEs)
The new Corporate Income Tax (CIT) cuts can result in substantial savings for low-profit firms and small private enterprises. Tax planning and optimization are essential in order to avoid paying more than you should as a small business owner.
A slower than expected economic growth and the impact of the extended trade war with the United States, have pushed China to look for a different avenue to stimulate its local economy. Similarly, the coronavirus outbreak and rising operational costs have further complicated the situation, making this stimulus more necessary than ever.
China’s Finance Ministry new measures will cut RMB 200 billion worth of taxes for small and micro firms.
The tax cuts, initially announced by China’s State Council, expand the scope of preferential policies to apply to more firms and offer targeted support for high-tech investments. They apply to taxes paid from January 1, 2019 to December 31, 2021.
The incentives will primarily benefit small and medium firms – such as family-owned businesses – earning limited revenue, which constitute most of the private businesses in China.
According to the Notice on Implementing the Policy of Inclusive Tax Relief for Small and Micro Enterprises, released by the Ministry of Finance, China will expand existing preferential policies for small and low-profit enterprises to apply to a wider range of companies.
Previously, companies with annual taxable income below RMB 1 million per year could benefit from a preferential CIT rate of 20% on 50% of their income, with the other 50% would be tax-free.
Now, such companies can enjoy the same preferential CIT rate of 20% but will only be taxed on 25% of their income, with the remaining 75% tax-free.
Further, enterprises with taxable income from RMB 1 to 3 million can benefit from a preferential 20% CIT rate on 50% of their income, with the other 50% tax-free.
The Chinese government estimated that the preferential CIT rates will apply to 95% of corporate taxpayers and lower the total tax burden for qualified enterprises by five to 10%.
In addition to reductions in CIT rates, the tax cuts offer value-added tax (VAT) exemptions for small-scale VAT taxpayers. VAT reform has been a priority item on Beijing’s agenda over the last decade.
According to the State Administration of Taxation, small-scale VAT taxpayers with monthly sales under RMB 100,000 are exempt from paying VAT on several items, up from RMB 30,000 previously.
Among the incentives, small-scale taxpayers with monthly sales under RMB 100,000 and quarterly sales under RMB 300,000 do not need to pay VAT on such sales. Further, general VAT taxpayers with less than RMB 5 million in sales over the last 12 months or four quarters can opt to transfer to small-scale VAT taxpayer status by December 31, 2019. Such conversion was previously not allowed by authorities.
Previously, companies with annual taxable income over RMB 1 million did not fall into the Small and Low-Profit Enterprises scope. Taxes were levied on their total income at the standard 25% rate.
Thanks to the new regulations, eligible businesses can make considerable savings on their tax payments. As a small-scale taxpayer, you only have to declare VAT on a quarterly basis.
Since March 1, 2019, as a small taxpayer you can go to the tax bureau and have them issue the VAT special invoice on your behalf, if your customers request one from you. It is not the most efficient, but it is an option. There are eight industries and sectors where you have the ability as a small-scale taxpayer to issue VAT special invoices yourself, such as leasing, scientific research, residential services, hotel industry, and construction.
As well, regional governments are permitted to cut local tax items for small-scale taxpayers by up to 50%, and authorities will expand tax breaks for venture capital firms and angel investors that invest in high-tech startups.
The Chinese government’s incentives package also includes generous tax rebates for venture capital (VC) companies and relaxed standards to qualify as a startup. Since January 2019, venture capital firms and individual investors can enjoy a 70% deduction on their taxable income. This is expected to provide a major investment boost in the tech sector and bolster innovation as growth in the traditional manufacturing sector keeps slowing.
In addition, criteria for enterprises to qualify as startups has also been amplified. Before the policy adjustment, startup companies could only have a maximum of 200 employees and total assets and annual income not exceeding RMB 30 million.
After the policy adjustment, startup companies can have as much as 300 employees and total assets and annual income up to RMB 50 million.
Provincial (autonomous regions and municipalities) governments may reduce the local taxes such as Resource tax, Urban Maintenance and Construction Tax, Stamp Duty, Urban Land Use Tax, and Farmland Occupation Tax as well as Education Surcharges and local Education Surcharges on small-scale VAT taxpayers by up to 50%.
"Qualified SMEs" should not engage in any restricted or prohibited industries in mainland China and should have annual taxable income not exceeding RMB 3 million, a maximum of 300 employees and total assets of no more than RMB 50 million.
These cuts are just the latest in a series of measures to cut costs for businesses, as the Chinese government looks to maintain employment and boost consumption as the economy slows. However, authorities have signaled that large-scale stimulus to the economy is not currently being considered. Instead, the government is adopting a targeted approach of tax cuts and incentives to alleviate financial pressure on China-based companies.
With the Chinese economy under strain, however, it is possible that further tax cuts will be announced and implemented in the near future, as the Chinese government seeks to maintain stability and stave off unemployment.
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.