Financial incentives play a crucial role in business decisions, sometimes even determining whether an international company will enter the Chinese market. Both local and foreign-owned companies that meet specific criteria and can provide the necessary documentation may be eligible for various tax benefits in China.
Taxation and incentives are familiar concepts for businesses worldwide, and China is no exception. However, it’s important to understand that China’s tax incentives are tools used by the government to attract investments that align with the country's economic goals. These policies can change annually based on shifting government priorities.
This doesn’t mean that international companies should be wary of doing business in China. On the contrary, China’s tax incentives are strategic measures designed to foster partnerships with global businesses. Companies should see these incentives as opportunities to succeed in the world’s second-largest market.
How Tax Incentives Work in China
Taxes in China fall into two main categories: corporate taxes (paid by businesses) and individual taxes (paid by employees). Within these categories, tax incentives are further divided into three types:
Sector-based tax incentives
Location-based tax incentives
Business size-based tax incentives
Below, we’ll explore some key incentives relevant to PTL Group’s clients, especially international tech-focused B2B and manufacturing companies.
Types of Tax Incentives for Companies in China
Corporate Income Tax (CIT)
International companies operating in China and earning income within the country are subject to Corporate Income Tax (CIT). The standard CIT rate is 25%, but eligible companies can benefit from various incentives.
Sector-Based CIT Incentives
To enhance its technological capabilities and digitalisation, China offers significant tax incentives for companies in these sectors. Since January 1st, 2020, key software and integrated circuit (IC) enterprises have enjoyed a reduced CIT rate of 10%. Similarly, qualified new/high-tech enterprises and those involved in pollution control can benefit from a 15% CIT rate, with the latter's incentive valid until December 31st, 2027. Agricultural technology companies are fully exempt from CIT.
Location-Based CIT Incentives
These incentives apply to companies registered in developing regions and special economic zones in China. For example, companies in ‘Encouraged Industries’ located in western China can access a reduced CIT rate of 15%, valid until December 31st, 2030. Enterprises engaged in substantial production or R&D activities within key industries in the Lingang New Area of the Shanghai Pilot Free Trade Zone, or in the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, may also qualify for a 15% CIT rate for their first five years of operation, with some benefits extending until December 31st, 2025.
Business Size-Based Tax Incentives – Focusing on Small Businesses
China offers tax incentives to small and low-profit companies, typically those with annual taxable income up to three million RMB and no more than 300 employees. In 2020, small and micro enterprises made up 98.5% of Chinese firms and contributed over 60% to the total GDP. The Chinese government views these businesses as vital to economic growth and aims to create a supportive environment for them.
Some tax benefits for small businesses include:
CIT Incentives: Small businesses are taxed at an effective CIT rate of 5%, applicable across all industries and locations. This incentive is in effect until December 31st, 2024.
VAT Incentives: Small-scale taxpayers usually subject to a 3% VAT rate can benefit from a reduced rate of 1%, valid until December 31st, 2027.
Tax Incentives for Foreign Employees in China
Individual Income Tax (IIT)
International expatriates in China are subject to Individual Income Tax (IIT), with the amount depending on their residency duration and income level. IIT incentives are mainly targeted at high-end foreign talents needed in China, particularly in tech and advanced industries.
It’s important to note that these IIT incentives are not nationwide but are available in specific areas. Eligible foreign talents in the Shanghai-Lingang area, parts of Beijing, the Greater Bay Area (GBA), the Hunan-Changsha area, and the Hainan Free Trade Port can benefit from a reduced IIT rate of 15%. In some regions, like Hainan and the GBA, these benefits extend until the end of 2035.
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