China's Small Low-Profit Enterprise Tax Incentive: Does Your WFOE Qualify for the 5% Rate?

2 days ago

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Quick answer: A WFOE that qualifies as a small low-profit enterprise pays an effective corporate income tax rate of 5% instead of the standard 25%. To qualify, it must have annual taxable income of no more than RMB 3 million, no more than 300 employees and total assets of no more than RMB 50 million, and must not be in a restricted or prohibited industry. The current policy runs until 31 December 2027.

Last updated: November 2026

Small low-profit enterprise tax in China at a glance – an effective 5% rate instead of 25%, taxable income up to RMB 3 million, up to 300 employees and total assets up to RMB 50 million

The small low-profit enterprise incentive is one of the most valuable tax breaks available to small foreign-invested companies in China, and no application is needed when the conditions are met. Many founders still do not know whether their WFOE qualifies.

This guide to the small low-profit enterprise incentive in China explains the four tests, how the 5% rate is calculated, the RMB 3 million cliff edge and how to claim it. For the wider picture, see corporate income tax in China.

The Qualification Tests

A WFOE must meet all four tests in the same tax year:

Test	Threshold
Annual taxable income	Not more than RMB 3 million
Employees	Not more than 300
Total assets	Not more than RMB 50 million
Industry	Not restricted or prohibited by the state

Employees include staff on labour contracts and dispatched workers. Employee numbers and total assets are measured as averages across the four quarters of the year.

How the 5% Rate Is Calculated

Only 25% of qualifying taxable income is taxed, at a rate of 20%. In effect, the rate is 5%. For a WFOE with taxable income of RMB 2,000,000:

As a small low-profit enterprise: 2,000,000 × 25% × 20% = RMB 100,000.
At the standard rate: 2,000,000 × 25% = RMB 500,000.

That is a saving of RMB 400,000 in one year.

The Cliff Edge at RMB 3 Million

The incentive is all or nothing. If taxable income goes above RMB 3 million, the company loses small low-profit status for the whole year and pays 25% on all of its taxable income:

Taxable income of RMB 2.9 million: tax of RMB 145,000.
Taxable income of RMB 3.1 million: tax of RMB 775,000.

Earning RMB 200,000 more costs RMB 630,000 in extra tax. This makes year-end planning important. The timing of genuine expenses, accurate accruals and correct classification can all matter, but planning must be based on real transactions, not artificial adjustments.

Other Small-Business Relief

Small low-profit enterprises also pay half the normal amount of several local taxes and surcharges, including stamp duty, urban maintenance and construction tax, and the education surcharges, also until the end of 2027.

How to Claim the Incentive

There is no application. The company claims the incentive itself in its quarterly corporate income tax prepayments, based on the figures so far, and confirms it in the annual reconciliation due by 31 May. It must keep records showing that it meets each test. See why the annual corporate income tax reconciliation matters and how annual tax and audit filing works.

Common Mistakes

These are the errors we see most often:

Not claiming in the quarterly prepayments, which means overpaying tax during the year.
Miscounting employees by leaving out dispatched workers.
Ignoring the asset test after a large capital injection.
Poor year-end cut-off that pushes taxable income over RMB 3 million.

If past filings have missed the incentive or got the tests wrong, they can be corrected. See catch-up bookkeeping in China.

Small Low-Profit Enterprise Tax at a Glance

Here is how the incentive compares with the standard rate.

Item	Small low-profit enterprise	Standard WFOE
Corporate income tax rate	Effective 5%	25%
Tax on RMB 2 million taxable income	RMB 100,000	RMB 500,000
Local taxes and surcharges	Half the normal amount	Full amount
Application	None, claimed in the company's own filings	Not applicable
Valid until	31 December 2027	Not applicable

Our China tax and audit and cloud accounting teams can review whether your WFOE qualifies and correct past filings if the incentive was missed.

Frequently Asked Questions

Do foreign-invested companies qualify as small low-profit enterprises?

Yes. Ownership does not matter. Any resident enterprise, including a WFOE, that meets the tests qualifies.

Do we need to apply for the 5% rate?

No. There is no application or approval. The company claims the rate itself in its quarterly corporate income tax prepayments and confirms it in the annual reconciliation, and must keep records showing it meets each test.

What happens if taxable income goes above RMB 3 million?

The company loses small low-profit status for the whole year and pays the standard 25% rate on all of its taxable income, not only on the part above RMB 3 million.

Does a loss-making WFOE need to worry about this?

Not for that year, because there is no tax to reduce. Tracking the tests still helps once the company becomes profitable.

What happens after 2027?

The current policy ends on 31 December 2027. It has been extended several times, but the terms after 2027 are not yet known.

Make sure your WFOE pays the right rate

We check whether your company qualifies, apply the incentive in every filing and plan your year-end around the RMB 3 million threshold.

Book your free 30-minute consultation →

Or call Shanghai +86 21 5116 2893 · Hong Kong +852 3978 0300

About Woodburn Accountants & Advisors

Woodburn Accountants & Advisors helps international businesses set up and run companies in mainland China and Hong Kong. With more than 30 years' experience and offices in Shanghai and Hong Kong, our team of chartered company secretaries, certified public accountants and tax specialists has guided hundreds of foreign companies, from first-time market entrants to established multinationals, through company registration, accounting, tax, payroll and annual compliance. We combine large-firm expertise with boutique responsiveness.

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