China’s Tax Incentives for Small Businesses (Updated)

We list China’s major tax incentives to foster various types of small businesses.

• UPDATE(March 29, 2023): At an executive State Council meeting chaired by Premier Li Qiang on March 24, 2023, China’s State Council announced the renewal of a range of supportive tax and fee policies, which includes the long-awaited extension of corporate income tax (CIT) incentives for small and low-profit enterprises (SLPE). Following this, the Ministry of Finance and the State Taxation Administration released corresponding announcements for the implementation. The reduced CIT policy for SLPE’s portion of income that is below RMB 1 million has been extended to the end of 2024. Meanwhile, SLPE will be subject to a 20 percent CIT rate on 25 percent of the taxable income amount for the portion of taxable income not exceeding RMB 1 million during the period from January 1, 2023, to December 31, 2024. That is to say, the effective CIT rate for SLPEs’ annual taxable income below RMB 1 million will increase from 2.5 percent to 5 percent.
• UPDATE(January 10, 2023): On January 9, 2023, China’s Ministry of Finance (MOF) and the State Taxation Administration (STA) jointly issued an announcement to clarify some of its value-added tax (VAT) incentives for 2023, including the VAT exemption policy for small-scale VAT taxpayers. During the period between January 1, 2023, and December 31, 2023, small-scale taxpayers with monthly sales of under RMB 100,000 (approx. US$14,740) shall be exempted from VAT. That is to say, if the monthly sales of the small-scale taxpayer are under RMB 100,000 (approx. US$14,740), or if the quarterly sales are under RMB 300,000 (approx. US$44,220) for small-scale taxpayers who choose one quarter as a tax payment period, the taxpayer will not be subject to VAT.  Meanwhile, during the same period, small-scale taxpayers that are subject to a VAT levy rate of 3 percent can enjoy a reduced levy rate of 1 percent. The VAT items that are subject to a 3 percent VAT prepayment rate shall enjoy a reduced prepayment rate of 1 percent. 
• UPDATE(March 29, 2022): On March 24, 2022, the Ministry of Finance and the State Taxation Administration released a new announcement clarifying issues related to VAT exemption for small-scale VAT taxpayers. Accordingly, from April 1, 2022 to December 31, 2022, small-scale taxpayers will be exempted from VAT payment or prepayment. Moreover, the taxable sales income of small-scale VAT taxpayers earned before March 31, 2022 will be taxed at a reduced rate of one percent instead of three percent. 
• UPDATE(March 18, 2023):On March 18, 2022, the Ministry of Finance and the State Taxation Administration released an Announcement on Further Implementing Preferential Income Tax Policies for Low-margin, Small Enterprises, which will be retrospectively implemented from January 1, 2022 to December 31, 2024. Accordingly, the CIT liability of small and low-profit enterprises (SLPEs) will be halved for the portion of taxable income exceeding RMB 1 million (approx. US$152,800) but less than RMB 3 million (approx. US$ 458,500). The incentive was first disclosed on the Two Sessions 2022.

China is actively creating a friendly environment conducive to the growth of small businesses, taking measures to ease the financial burdens and solve financing difficulties for small and micro firms. During the COVID-19 pandemic, these measures have been further enhanced to help affected firms weather the storm.

In this article, we introduce the major tax incentives for small businesses, including corporate income tax (CIT) cuts for small and low-profit enterprises (SLPEs), individual income tax (IIT) reduction for small business owners, as well as concessions on value-added tax (VAT) and other taxes and fees for small-scale taxpayers and tax measures to lower financing costs of small and micro enterprises.

What are China’s tax incentives for small businesses?

CIT incentives for small and low-profit enterprises

China has recently enhanced its inclusive tax cut policy for small and low-profit enterprises. SLPEs refer to enterprises engaged in non-restrictive and non-prohibited businesses that meet the following three conditions:

• Annual taxable income not exceeding RMB 3 million (approx. US$458,500);
• Number of employees not exceeding 300; and
• Total asset value not exceeding RMB 50 million (approx. US$7.7 million).

All types of SLPEs in China are able to enjoy a reduced corporate income tax (CIT) rate of 20 percent in combination with a reduction of their tax base.

Previously, SLPEs were subject to:

• 20 percent CIT rate on 12.5 percent of the taxable income amount for the portion of taxable income not exceeding RMB 1 million (approx. US$152,800) (effective from Jan. 1, 2021-Dec. 31, 2022); and
• 20 percent CIT rate on 25 percent of their taxable income amount for the portion of taxable income more than RMB 1 million but not exceeding RMB 3 million (effective from Jan. 1, 2022-Dec. 31, 2024)

At an executive State Council meeting chaired by Premier Li Qiang on March 24, 2023, China’s State Council announced the renewal of a range of supportive tax and fee policies, which includes the long-awaited extension of corporate income tax (CIT) incentives for small and low-profit enterprises (SLPE). Following this, the Ministry of Finance and the State Taxation Administration released corresponding announcements for the implementation.

Under the new policy, the reduced CIT policy for SLPEs’ portion of income that is below RMB 1 million has been extended to the end of 2024. Meanwhile, SLPEs will be subject to a 20 percent CIT rate on 25 percent of the taxable income amount for the portion of taxable income not exceeding RMB 1 million during the period from January 1, 2023, to December 31, 2024.

That is to say, all SLPEs will be subject to a 20 percent CIT rate on 25 percent of their taxable income amount after the adjustment, which means the effective CIT rate for SLPEs has been unified to 5 percent.

Because the SLPE evaluation is carried out at the entity level (instead of at the group level), small subsidiaries of foreign multinational enterprises (MNEs) in China can also benefit from these CIT cuts.

VAT incentives for small-scale taxpayers

China offers value-added tax (VAT) benefits to small-scale taxpayers, including reduced VAT levy rate and increased VAT threshold.

Here, small-scale taxpayers normally refer to taxpayers whose annual VAT taxable sales do not exceed RMB 5 million (approx. US$0.77 million).

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However, unincorporated entities, enterprises, and individually owned businesses that do not often incur VAT-taxable transactions, even if their annual taxable sales exceed the stipulated standard, can choose to be treated as small-scale taxpayers (instead of being registered as general taxpayers).

VAT exemption

On January 9, 2023, the MOF and STA jointly issued an announcement to clarify some of its VAT incentives for 2023, including the VAT exemption policy for small-scale VAT taxpayers. The Announcement on Clarifying VAT Exemption and Other Policies for Small-Scale VAT Taxpayers [MOF STA Announcement [2023] No.1] (hereinafter the “small-scale taxpayer policies”) will be applied during the period between January 1, 2023, and December 31, 2023.

The small-scale taxpayer policies clarify that during the period between January 1, 2023, and December 31, 2023, small-scale taxpayers with monthly sales of under RMB 100,000 (approx. US$14,740) shall be exempted from VAT.

That is to say, if the monthly sales of the small-scale taxpayer are under RMB 100,000 (approx. US$14,740), or if the quarterly sales are under RMB 300,000 (approx. US$44,220) for small-scale taxpayers who choose one quarter as a tax payment period, the taxpayer will not be subject to VAT. 

This threshold is a bit lower than that in 2021 and 2022. During the period from April 1, 2021, to December 31, 2022, the VAT threshold for small-scale taxpayers was RMB 150,000 (approx. US$22,110) per month (or RMB 450,000 per quarter, approx. US$66,300). 

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There is one situation where the taxpayer with monthly sales of over RMB 150,000 can still be exempt from VAT. That is when the taxpayer occasionally occurs real estate transactions that month. Some small-scale taxpayers have the obligation to pre-pay VAT tax. The policy has clarified that if their monthly sales in the place where the VAT needs to be pre-paid do not exceed RMB 150,000, they are not required to pre-pay VAT.

The state tax authority has clarified that if a small-scale taxpayer with total monthly sales of more than RMB 150,000, but after deducting the sales of real estate, other sales (i.e., the sales of goods, labor, services, and intangible assets) do not exceed RMB 150,000, the small-scale taxpayer can still be exempt from VAT.

Meanwhile, the VAT administration notice clarifies that small-scale taxpayers with total monthly sales of over RMB 100,000, but whose sales when excluding real estate sales occurring in the current period is less than RMB 100,000, will be exempt from paying VAT on the sale of goods, labor services, services, and intangible assets. 

Small-scale taxpayers can choose to waive the VAT exemption incentive and instead issue special VAT invoices for a specific sale. 

Reduced VAT rates

The small-scale taxpayer policies clarify that during the period between January 1, 2023, and December 31, 2023, small-scale taxpayers that are subject to a VAT levy rate of 3 percent can enjoy a reduced levy rate of 1 percent. The VAT items that are subject to a 3 percent VAT prepayment rate shall enjoy a reduced prepayment rate of 1 percent. 

Previously, during the period from April 1, 2022, to December 31, 2022, small-scale VAT taxpayers that are subject to a VAT levy rate of 3 percent will be exempted from VAT payment or prepayment. 

The VAT administration notice clarifies that small-scale taxpayers can choose to waive the VAT reduction incentive and instead issue special VAT invoices for a specific sale.  

Education surcharge and other tax reduction

China’s national and local education surcharges are calculated based on a taxpayer’s actual payment of VAT and consumption tax.

At present taxpayers whose sales amount does not exceed RMB 100,000 per month (or RMB 300,000 per quarter) will be exempt from education surcharge, local education surcharge, and water conservancy construction fund.

As mentioned above, since April 1 this year, the VAT threshold for small-scale taxpayers has been lifted to RMB 150,000/month (or RMB 450,000/quarter). However, taxpayers should note that the new VAT threshold will not affect the payment of education surcharge unless the relevant policy is updated.

Aside from the exemption of education surcharges, taxpayers can keep an eye on additional tax and fee relief offered locally.

Local governments are granted authority to reduce the levying of six types of taxes and two fees on small-scale taxpayers within the tax base of 50 percent. The six taxes and two fees refer to resource tax, urban maintenance and construction tax, property tax, urban land use tax, stamp duty (excluding stamp duty on securities transactions), arable land use tax, education surcharge, and local education surcharge.

IIT incentives for small business owners

From January 1, 2021 to December 31, 2022, during which period individually owned businesses, sole proprietorships, and partnership enterprises can enjoy some individual income tax (IIT) relief.

For the portion of an individually owned business’ income from a business operation that does not exceed RMB 1 million, the business is entitled to a 50 percent reduction of IIT on the basis of the prevailing incentives.

From April 1, 2021, individually owned businesses, sole proprietorship enterprises, partnership enterprises, and individuals will no longer be required to pre-pay IIT at the time of issuance of cargo transport VAT invoices on behalf.

Tax measures to lower financing costs of small businesses

To help small and micro enterprise raise funds, China exempts financial institutions from paying VAT on their interest income derived from small loans to farmers, small enterprises, micro enterprises, and individually owned businesses. Besides, loan contracts signed between small or micro enterprises and financial institutions are exempt from stamp duty.

Both measures are effective until December 31, 2023.

(This article was originally included in the China Briefing Magazine issue Tax Incentive in China, and was last updated on March 29, 2023)

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