China’s Tax Incentives for the Manufacturing Sector in 2023

In an effort to boost economic growth, the Chinese government has extended a series of tax policies first implemented during the COVID-19 pandemic, adding to the existing long-term policies to support industry growth and innovation. We provide an overview of some of the preferential tax policies available to manufacturing companies in China, including policies to reduce the tax burdens of smaller companies, tax incentives to increase innovation and investment, and region-specific corporate income tax reductions.

China’s manufacturing sector remains one of the most important drivers of the country’s economic growth. As China emerges from the pandemic, the government is seeking to boost the industry’s development by highlighting the preferential and support policies that reduce tax and fee burdens on companies in this sector. 

In addition to existing long-term preferential tax policies, China has recently extended COVID-era preferential tax policies that were due to expire at the end of 2023 to 2027. Many of these policies are also applicable to manufacturing companies of various sizes. 

In this article, we highlight some of the preferential tax and fee policies that are currently available to manufacturing companies, including reductions to CIT and VAT, as well as various fee and expense deductions. Note that many of these policies may be available to companies in other industries as well. 

Tax incentives for small and low-profit manufacturing companies 

These policies are applicable to small and low-profit companies in all industries. However, due to the relatively low eligibility threshold for sales volume and profits, in the manufacturing industry, they will mostly be applicable to light manufacturing companies that produce smaller amounts of consumer-oriented products. 

The preferential policies for small and low-profit enterprises are summarized in the table below.

Preferential VAT and premiums reduction policies 

These include exemptions and reductions of VAT for small-scale taxpayers with monthly sales of under RMB 100,000 (approx. US$14,740) and reduction of employment security fund payments for disabled persons. 

For context, companies in China have a minimum quota of disabled employees that they must hire, which differs from province to province. Companies that don’t meet this quota have to pay into a fund called the Baozhang Jin (保障金). The necessary amount again varies according to location, but the majority of companies choose to pay into the fund rather than employ the requisite number of disabled workers that would absolve them from paying. 

See our article on hiring disabled staff members in China for more information.

Reduced CIT rate in key development zones 

The development zones offering the reduced 15 percent CIT rate for companies in various manufacturing fields are summarized in the table below. 

In most cases, companies must be able to prove that they have “substantial operations” in an eligible industry within the development zone itself. For more information on the requirements for substantial operations, see our dedicated article here. 

Preferential policies to encourage innovation 

These include VAT and CIT policies encouraging technology transfer, as well as a pre-tax super deduction for R&D expenses. 

Earlier this year, China extended the R&D super deduction indefinitely. Under the policy, companies can deduct an additional 100 percent of the actual amount of R&D expenses before tax, provided that they do not form intangible assets and are included in the profits and losses of the current period. This in effect means that companies can deduct a total of 200 percent of their R&D expenses before tax, resulting in lower corporate income tax (CIT) payable for a given tax year. 

For more information on this policy, see our dedicated article here.

Policies to encourage investment 

Among them is an exemption of withholding tax for all non-restricted foreign investment projects and sectors on profits distributed from Chinese resident enterprises to overseas investors for domestic direct investment. 

Policies directed at VC firms include deductions of their investments from their taxable income. For more information on China’s startup environment and preferential policies for VC investment, see our dedicated article here.

Identifying and applying China’s preferential tax policies 

Moreover, individual provinces and development areas may implement local tax and fee policies aimed at attracting and growing specific industries. Manufacturing, as one of China’s most important drivers of GDP growth, is frequently the target of local support measures, which may also include preferential treatment other than tax policies. 

Given the variety of policies available, as well as the varying eligibility and application criteria, identifying and assessing eligibility for these tax policies can be difficult. Foreign companies may also wish to assess where preferential policies are available and for how long before entering the China market or expanding to a new area. 

If your business needs assistance assessing which preferential policies it is eligible for, you can consult our tax experts by contacting china@dezshira.com.