China Extends Various Tax Incentives for Small Businesses

On 2 August 2023, China’s Ministry of Finance and State Administration of Taxation (SAT) jointly issueda number of announcements extending tax incentives for small businesses until the end of 2027.
The extended tax incentives include:Preferential policies on corporate income tax (CIT) for small and micro-profit enterprises (SLPE).VAT reduction and exemption for small-scale taxpayers.Reduction and exemption of personal income tax for self-employed businessmen.

Tax incentives for small enterprises, microenterprises and individual entrepreneurs to reduce financing costs.

This article will explain each of these latest tax incentives.
Enterprise Income Tax Preferential Policies for Small and Microenterprises
Small and micro-profit enterprises refer to enterprises engaged in non-restricted and non-prohibited businesses that meet the following three conditions:Annual taxable income does not exceed RMB 3 million (approximately US$458,500)The number of employees does not exceed 300;The total value of assets does not exceed RMB 50 million (approximately US$7.7 million).

All types of SLPEs in China are entitled to a reduced enterprise income tax rate of 20 per cent and a lower tax base. The standard corporate income tax rate is 25 per cent.

The reduction in the tax base for SLPEs is progressive until 2023 as follows:

For taxable income up to RMB1 million (approximately US$152,800), 12.5 per cent of taxable income will be added to the tax base.

For the portion of taxable income exceeding RMB 1 million but not exceeding RMB 3 million (approximately US$458,500),25 per centof the taxable income will be included in the tax base.

Preferential VAT Policies for Small-Scale Taxpayers
China provides VAT incentives for small-scale taxpayers, including lowering the VAT levy rate and raising the VAT threshold.Small-scale taxpayers in this context usually refer to taxpayers whose annual VATable sales do not exceedRMB 5 million (approximately US$770,000).However, unincorporated entities, enterprises and individual businesses with infrequent VAT taxable transactions may choose to be small-scale taxpayers (instead of registering as general taxpayers) even if their annual taxable sales exceed the prescribed threshold.
Exemption from VAT
Previously, according to an announcement jointly issued by the Ministry of Finance and the State Administration of Taxation (SAT) on 9 January 2023, small-scale taxpayers with monthly sales of less than RMB100,000 (approximately US$14,740) will be exempted from VAT during the period from 1 January 2023 to 31 December 2023, which means that small-scale taxpayers will be exempted from VAT if their monthly taxable sales exceed the prescribed threshold.In other words, if a small-scale taxpayer has monthly sales of less than RMB100,000 (approximately US$14,740) or quarterly sales of less than RMB300,000 (approximately US$44,220) for small-scale taxpayers who choose a quarterly tax period, the taxpayer will not be required to pay VAT.This VAT exemption policy is currently valid until 31 December 2027 according to the latest State Administration of Taxation Announcement [2023] No. 19 issued by the Ministry of Finance.
Reduction of VAT rate
Similarly, according to the above announcement, during the period from 1 January 2023 to 31 December 2023, small taxpayers with a VAT levy rate of 3%will be entitled to a reduced rate of 1%. VAT items subject to a 3 per cent pre-taxation rate will be subject to a reduced pre-taxation rate of 1 per cent.The VAT reduction is currently valid until 31 December 2027, according to the latest Cai Shui [2023] No. 19 announcement issued by the Ministry of Finance.
Individual Income Tax Incentives for Individual Businesses
Previously, individual industrial and commercial households were entitled to a 50% reduction in personal income tax for the portion of their taxable income not exceeding RMB1,000,000 (approximately US$152,800) by 31 December 2024.Currently, according to the latest Cai Shui [2023] No. 12 Announcement issued by the Ministry of Finance, the upper limit of taxable income for individual businessmen to enjoy the preferential policies on individual income tax has been raised to RMB2 million (approximately US$305,600), and the tax incentives are valid until 31 December 2027.
Tax Measures to Reduce Financing Costs for Small Enterprises
To help small and micro enterprises in financing, China exempts from value-added tax (VAT) the interest income obtained by financial institutions from the granting of small loans to small and micro enterprises and individual entrepreneurs. In addition, small and micro enterprises are exempted from stamp duty on loan contracts signed with financial institutions.Small and micro-enterprises are defined as enterprises that comply with the Provisions on the Standard for the Classification of Small and Medium-sized Enterprises. Microfinance refers to loans provided to small enterprises, microenterprises or individuals.

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