China's Ministry of Finance (MOF) and State Taxation Administration (STA) issued multiple announcements extending the preferential tax policies for small enterprises until the end of 2027 on August 2, 2023.
The extension immediately follows Monday's executive meeting of the State Council, at which the State Council called for an extension of the business tax and fee reductions implemented over the past three years.
Included in the extended preferential tax policies are:
Small and low-profit enterprises (SLPE) tax breaks under the corporate income tax (CIT).
Exemptions and reductions from the value-added tax (VAT) for small-scale taxpayers.
The reduction of "six taxes and two fees" for minor taxpayers, SLPEs, and privately held companies.
Individual income tax (IIT) reduction policy for enterprises owned by individuals.
Favourable tax treatment for small businesses, micro businesses, and businesses owned by individuals to reduce financing costs.
Prior to the extension, these tax incentives for small enterprises were scheduled to expire at the end of 2023 or 2024.
SLPEs refer to businesses that engage in non-restrictive and non-prohibited activities and satisfy the following three conditions:
Maximum annual taxable income of RMB 3 million (approximately $458,500); maximum number of employees of 300; and maximum total asset value of RMB 50 million (approximately $7.7 million).
All categories of SLPEs in China are eligible for a 20% reduction in their CIT rate and a reduction in their tax base. The standard rate of CIT is 25%.
Before 2023, the reduction of an SLPE's tax base was progressive as follows:
12.5 percent of the portion of taxable income that does not exceed RMB 1 million (approximately US$152,800) will be included in the tax base.
25 percent of the portion of taxable income exceeding RMB 1 million but not exceeding RMB 3 million (approximately US$458,500) will be included in the tax base.
Incentives for small-scale taxpayers regarding the value-added tax
China provides minor taxpayers with VAT benefits, including a reduced VAT levy rate and an increased VAT threshold.
Small-scale taxpayers typically have annual VAT taxable sales of less than RMB 5 million (approximately US$0.77 million).
However, unincorporated entities, enterprises, and individually owned businesses that do not frequently engage in VAT-taxable transactions can choose to be regarded as small-scale taxpayers (instead of being registered as general taxpayers) even if their annual taxable sales exceed the standard.
VAT exclusion
Previously, per an announcement issued jointly by the MOF and STA on January 9, 2023, small-scale taxpayers with monthly sales of less than RMB 100,000 (approximately US$14,740) will be exempt from VAT between January 1, 2023 and December 31, 2023.
In other words, if the small-scale taxpayer's monthly sales are less than RMB 100,000 (approximately US$14,740) or if the small-scale taxpayer's quarterly sales are less than RMB 300,000 (approximately US$44,220) for small-scale taxpayers who choose one quarter as a tax payment period, the taxpayer will not be subject to VAT.
IIT incentive for privately owned companies
Previously, sole proprietorships could receive a 50 percent reduction on their IIT liability for the portion of their taxable income that did not exceed RMB 1 million (approximately US$152,800) before December 31, 2024.
According to the most recent MOF STA Announcement [2023] No.12, the maximum taxable income eligible for this IIT incentive for privately held businesses has been increased to RMB 2 million (approximately US$305,600), and this preferential tax policy will remain in effect until December 31, 2027.
Tax measures to reduce small business financing costs
China has exempted financial institutions from paying value-added tax on interest income derived from minor loans to small enterprises, micro enterprises, and individually owned businesses in order to help small and micro enterprises raise capital. In addition, loan agreements between micro and small businesses and financial institutions are exempt from stamp duty.
According to the Small and Medium-Sized Enterprises Classification Standard Regulations, small and micro enterprises are businesses that comply with the classification criteria. (Please refer to our China Briefing Article for additional information)
Small loans are loans for small enterprises, micro-enterprises, or privately held businesses with a bank credit of less than RMB 1 million (including the principal). Small loans refer to loans of a single business where both the loan contract amount and loan balance are below RMB 1 million (including the principal amount) if the small business has no bank credit.