Incentives for Doing Business in China

China's first standalone VAT Law took effect January 1, 2026, alongside Implementation Regulations under State Council Decree No. 826, replacing the provisional VAT regulations that had governed the tax since the 1990s. A follow-up rule, Caishui [2026] No. 10, reorganized VAT preferential items into "long-term" and "time-bound" categories , meaning a VAT exemption your business relied on last year may now carry an explicit expiry date it never had before, a change KPMG's China tax practice flags as one to actively monitor rather than assume is permanent.

Contributing Advisor

Allan Xu

Partner

Separately, and more consequentially for market entry decisions, the Catalogue of Encouraged Industries for Foreign Investment (2025 Edition) replaced the 2022 edition on February 1, 2026, a net increase of 205 items and 303 modifications, bringing the combined national and regional catalogues to 1,679 items. This catalogue is the eligibility gate for four separate benefits: customs duty exemption on imported self-use equipment, preferential industrial land pricing, the 15 percent CIT rate available in western China and Hainan, and the reinvestment tax credit covered later in this guide. A sector-eligibility assumption confirmed against the 2022 catalogue may no longer be held under the 2025 version.

None of this means the incentive environment got less generous, the expanded catalogue arguably widens it. It does mean that eligibility confirmed a year or two ago is worth re-checking against the current reference documents, not assuming still applies.

Which type of tax incentive applies to your business?

China's incentives fall into four overlapping categories, and most foreign-invested enterprises qualify under more than one at once:

• By tax type , reduced CIT rates, VAT exemptions or refunds, IIT relief for qualifying individuals, accelerated depreciation on fixed assets
• By business size , small and low-profit enterprise (SLPE) treatment for smaller entities, regardless of foreign or domestic ownership
• By sector , High and New Technology Enterprise (HNTE) status, key software and integrated circuit (IC) enterprise recognition, and other sector-specific rates
• By region , western China, the Hainan Free Trade Port, the Greater Bay Area (GBA), and free trade zone programs

Which combination is relevant depends on where your entity sits today , sector classification, entity size, and registered location , rather than a single incentive that applies to everyone.

Claiming these incentives follows two distinct tracks and knowing which one you're on changes your paperwork timeline. Some incentives, including the SLPE reduced rate and most CIT preferential rates, are self-assessed: you calculate and report the benefit at annual reconciliation and hold documentation in case the tax bureau requests it. Others, HNTE status, key software/IC enterprise recognition, and several regional 15 percent rates, require formal certification or pre-filing before the benefit applies, often with a multi-month review and periodic renewal. Confirming which track a given incentive sits before your annual filing deadline, rather than during it, is the difference between a smooth claim and a missed window.

Can foreign-invested enterprises access the same incentives?

Generally, yes. Since China's 2008 CIT Law unification, foreign-invested enterprises qualify for the same national incentives, SLPE treatment, HNTE status, regional rates, as domestic companies, assessed against the same criteria, with no separate foreign-investor rate. Where FIEs more often run into friction is documentation: substantiating R&D spend, IP ownership, or genuine regional operational substance can be harder for a newer foreign subsidiary to evidence than for an established domestic group with a longer filing history.

Does your company qualify as a small and low-profit enterprise under China’s 2026 rules?

The small and low-profit enterprise (SLPE) regime is one of the most widely used, and most commonly miscalculated, incentives available to foreign investors. It is not a flat rate: it applies in tiers.

To qualify, a business must meet all three of the following: annual taxable income not exceeding RMB 3 million, no more than 300 employees, and total assets not exceeding RMB 50 million, while operating in an industry that is not prohibited or restricted for the relevant investment.

Because the rate is tiered, a company with exactly RMB 3 million in taxable income doesn't pay a flat 5 percent, the first RMB 1 million is taxed at 2.5 percent and only the remaining RMB 2 million at 5 percent, for a blended effective rate of roughly 4.2 percent. Treating the tier as a flat rate leads to over-provisioning tax at the lower end of the range and under-provisioning near the RMB 3 million ceiling, worth flagging if your finance team is modeling this from a general summary rather than the tiered structure itself.

Which incentives can foreign investors combine?

Beyond SLPE treatment, China's sector- and region-based incentives are where most of the tax planning value sits for mid-sized and larger foreign investors, but eligibility for several of them now runs through the 2025 Catalogue.

A practical note on structure: several of these regional programs, Qianhai, Hengqin, Nansha, Lingang , carry their own sub-catalogues and operational-substance tests on top of the national framework, which is where entity-location decisions made before incorporation matter more than incentive research made after the fact.

Can you combine HNTE status with the western region 15 percent CIT rate?

Generally, no, a company applies whichever single preferential CIT rate is most advantageous, rather than stacking two reduced rates on the same income, since HNTE and the western-region rate both replace the same 25 percent standard rate rather than layering on top of one another. What can combine with a reduced rate are non-rate incentives, the R&D expense super-deduction, the equipment investment tax credit, and the reinvestment tax credit covered next, because these reduce the tax base or offset the liability rather than compete for the same rate.

The 2025 Catalogue reshaped eligibility for regional and sector-based incentives. DSA can assess whether your business is newly eligible , or newly excluded , under the updated Catalogue before you rely on a prior classification.

Should you reinvest your China profits to claim the new 10 percent tax credit?

For investors already generating distributable profit in China, the most significant new incentive is not a rate change, it's a credit on reinvestment. Under MOF/STA/MOFCOM Announcement 2025 No. 2, qualified foreign investors who reinvest distributed profits from a Chinese subsidiary can offset up to 10 percent of the reinvested amount against their Chinese tax payable, with unused credit carried forward indefinitely, including past the policy's current end date.

This goes further than the older withholding-tax deferral mechanism it sits alongside: deferral only postpones tax on reinvested dividends, while the new credit is a genuine reduction in tax paid. The conditions, however, are specific and worth checking off before you rely on the number:

• Source of funds: the reinvested amount must come from actual dividend distributions of retained earnings from a China resident enterprise , not merely booked, unpaid profit.
• Reinvestment type: increasing registered capital or capital reserves, establishing a new China resident enterprise, or acquiring equity from an unrelated party. Investments in listed stock are excluded unless they qualify as a strategic investment.
• Sector eligibility: the investee must operate in an industry listed in the current (2025) Catalogue of Encouraged Industries for Foreign Investment.
• Fund flow: funds must transfer directly from the distributing enterprise to the investee , round-tripping through intermediate accounts risks disqualifying the claim.
• Timing window: the reinvestment must occur between January 1, 2025 and December 31, 2028, though the credit itself, once earned, carries forward beyond that date.
• Holding period: the reinvestment must be held continuously for a minimum of 60 months (five years). Early withdrawal triggers repayment of the deferred tax, forfeiture of any unused credit, and late-payment surcharges from the date the credit was first used.

The OECD's broader research on investment tax incentive design makes a point worth applying here: a credit tied to a multi-year holding condition is a structural commitment, not a one-off filing choice , worth modeling against your actual exit or repatriation horizon before claiming it.

What causes China tax incentive claims to be?

Most of the incentives above are conditional, not one-time grants, and the OECD's work on investment incentive promotion and facilitation makes the same point about incentive regimes generally: the design of the condition matters as much as the headline rate. In China's case, the recurring reasons a claim gets challenged or reversed are fairly consistent:

• Classifying a project against the outdated 2022 Catalogue instead of the 2025 edition now in force.
• Treating the SLPE benefit as a flat 5 percent rather than calculating the tiered 2.5 percent/5 percent structure correctly.
• Letting HNTE certification lapse at its periodic renewal, where R&D expense ratios, IP ownership, and revenue-mix criteria are reassessed each cycle.
• Structuring a reinvestment through an indirect or multi-step fund flow instead of a direct transfer from the distributing enterprise.
• Assuming a reduced CIT rate and the reinvestment credit stack automatically, without checking the specific policy documents that govern each.
• Not retaining the underlying paperwork, dividend resolutions, equity transfer agreements, R&D expense ledgers, for as long as a tax bureau can revisit the filing.

What happens if an incentive is revoked after you've already claimed it?

The exposure is retroactive. If an HNTE company's R&D spend falls below the qualifying threshold at renewal, or a reinvestment is withdrawn before the five-year mark, the tax bureau can require repayment of the tax originally reduced, plus late-payment interest, and in some cases forfeiture of any remaining credit balance. Building incentive claims around documentation that can be defended two or three years later is not an optional extra step, it's what separates a saved percentage point from a retroactive liability.

China's 2026 policy changes don't shrink the incentive opportunity for foreign investors, the expanded Catalogue, if anything, widens it. What they do is raise the cost of relying on eligibility assumptions from a year or two ago. For investors weighing a new China entity, an expansion, or a first profit repatriation decision, the practical next step is usually a sector- and entity-specific eligibility check against the current rules, not a general summary of what's available. DSA's business advisory team can walk through that check against your specific structure.