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Extension of certain tax benefits in China seek to further support post-pandemic recovery

Eligible companies in China will continue to enjoy a series of supportive tax and fee policies recently extended by the Chinese government, which will reduce their tax burden by about US$ 70 billion. Some of these measures had been approved during the COVID-19 pandemic to support vulnerable businesses in key industries.

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In their last meeting, China’s State Council announced the renewal of these policies, which include cuts to certain taxes and fees for small enterprises, such as pre-tax deductions on R&D expenses, reduced corporate tax rates for low-profit companies, and reductions to insurance premiums, among others.

The policy of increasing the pre-tax deduction ratio of R&D expenses for eligible companies from 75 percent to 100 percent will be continued with no expiration date specified.

Originally, this measure was only available to manufacturing enterprises. In 2021, Technology-based small- and medium-sized enterprises (TSMEs) were only eligible for 75 percent pre-tax

deductions. A year later, in 2022, the preferential tax deduction was expanded to TSMEs to promote innovation.

In September 2022, the Ministry of Finance (MOF), State Taxation Administration (STA), and the Ministry of Science and Technology (MOST) temporarily expanded the policy of the super deduction of R&D expenses to general enterprises.

According to the joint announcement, the ratio for the additional pre-tax deduction for R&D expenses for eligible enterprises was raised from 75 percent to 100 percent during the period from October 1, 2022, to December 31, 2022. And in an effort to promote innovation, the government recently made this a long-term policy.

In addition, tax authorities expanded until 2024 the policy of reducing the income tax of small low-profit enterprises (SLEPs) and sole proprietors with an annual taxable income of less than RMB 1 million (approx. US$145,469).

The following eligibility will be applied:

  • SLPEs whose annual taxable income does not exceed RMB 1 million, are eligible to be taxed on just 25 percent of their taxable income and for a reduced corporate income tax (CIT) rate of 20 percent; and

  • Sole proprietorships with an annual taxable income of below RMB 1 million will have their individual income tax (IIT) reduced by half.

SLPEs refer to companies that operate in non-restricted areas and industries with an annual taxable income of less than RMB 3 million (US$436,408), less than 300 employees, and total assets of less than RMB 50 million (approx. US$7.3 million).

Previously, SLPEs were subject to a 20 percent CIT rate on 12.5 percent of the taxable income amount for the portion of taxable income not exceeding RMB 1 million, during the period from January 1, 2021, to December 31, 2022.

The new CIT rate for SLPEs’ annual taxable income below RMB 1 million increases from 2.5 percent to 5 percent, which is in line with that for the portion of SLPEs’ annual taxable income that is more than RMB 1 million but less than RMB 3 million.

Regarding reduced unemployment and work-related injury insurance premium rates, the policy, which was supposed to expire in 2023, will be extended until the end of 2024.

The total unemployment insurance premium rate (employer and employee) was reduced to 1 percent. Local rates for individuals and companies can be set by the province, region, or municipality, but the rate must be the same within the region and the individual rate cannot be higher than the company rate.

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For work-related injury insurance, where the cumulative balance of the work-related injury insurance fund can cover 18 to 23 months of payments, the current rate was reduced by 20 percent. In areas where the cumulative balance of the fund can cover more than 24 months of payments, the current rate was reduced by 50 percent.

The Customs Tariff Commission of the State Council informed that the policy to impose a zero-tax rate on coal imports will be extended to the end of 2023, to help “support the safe and stable supply of domestic coal”. This was first announced in April 2022.

Chian’s government is focused on maintaining energy security, despite efforts to reduce carbon emissions.

The reduction by 50 percent of urban land use tax on land utilized for bulk commodity storage by logistics companies will be pushed to the end of 2027. This was introduced by the MOF and STA in 2020 to promote the development of the logistics industry.

Logistics enterprises are businesses involved in warehousing or transportation and third-party logistics services. The storage facility must also meet certain requirements and be used to store certain types of bulk commodities.

To reduce the burden on small and micro enterprises, the policy to reduce the payment of employment security funds for disabled people was expanded until the end of 2027. This policy was initially introduced in 2020 and was retroactively implemented from January 1, 2023. Eligible companies that have already paid can apply for a refund.

In addition, companies with 30 employees or fewer will continue to be exempted from the employment security fund for disabled persons.

Though the announced extensions are not as far reaching as the ones implemented in 2022 to keep struggling business afloat during the COVID-19 pandemic, foreign companies should be informed about the new extensions to be able to benefit from them.

Given the strained budgets of local governments, the continuation of large-scale tax and fee cuts will probably not be viable in the long term.

Nevertheless, the Chinese government has fully reopened its economy post-pandemic and will continue to support the economic recovery of the country.


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