By Dezan Shira & Associates
Editor: Andrea Tonini
Over the last decade, China has introduced a series of fiscal policy initiatives to boost small and medium enterprises’ (SMEs) development and innovation efforts. Thanks to special supporting funds, tax incentives and administrative benefits, the SME sector currently represents a key segment of China’s economy, contributing 60 percent of the country’s GDP, 50 percent of fiscal and tax revenue, and 75 percent of urban employment.
In this article, we focus on the latest preferential tax policies for SMEs in China, which relate to a reduced corporate income tax (CIT) rate and exemptions from value-added tax (VAT) and business tax. The new fiscal incentives are geared to reduce SMEs’ tax burden and promote their investments, thus representing a means to ensure economic growth in the Middle Kingdom.
What is an SME?
In China, the definition of an SME is complex and varies depending on industry sectors. In 2011, the Ministry of Industry and Information Technology, the National Bureau of Statistics, the National Development and Reform Commission, and the Ministry of Commerce jointly promulgated the “Regulations on the Standards for Classification of SMEs”, which divides SMEs into three categories: medium, small and mini.
Specific standards apply for each industry, according to three criteria:
- Number of employees
- Total assets
- Operating revenue
Individual businesses and industries other than those specified in the Regulations are also categorized by reference to this law.
What is new?
On August 19, Chinese Premier Li Keqiang announced a new round of preferential tax policies for SMEs during an executive meeting of the State Council. All types of SMEs that meet the requisite conditions will be entitled to the following tax incentives:
- SMEs with a taxable income not exceeding RMB 300,000 will be allowed to pay corporate income tax (CIT) at the rate of 20 percent on only 50 percent of their taxable income. Specifically, if the SME prepays CIT based on its actual profit for the current year, and the accumulative actual profit at the time of making the prepayment is less than RMB 300,000, it is entitled to the Halved Tax Policy.
- SMEs with a monthly sales volume of RMB 20,000 to RMB 30,000 shall be exempt from value-added tax (VAT) and business tax.
The policy will take effect on October 1 and last until December, 2017.
For what concerns the tax filing requirements for eligibility of preferential tax treatment, SMEs enjoy a simplified procedure. While other types of enterprises that wish to enjoy tax benefits in annual CIT return need to submit specific forms to the tax bureaus – such as the corporate income tax preferential tax treatment filing form – SMEs just need to fill the relevant sections in the Annual CIT return form, without other filing requirements.
According to the Ministry of Commerce, in 2012 there were 42 million SMEs in China, which accounted for 99 percent of registered firms in the country. This figure continues growing as SMEs are expected to play a bigger role in sustaining and improving China’s competitiveness. While small and medium businesses have become a major drive of the country’s economic advancement in most of industries, China is particularly enjoying the positive influence of SMEs towards innovation in the R&D and technology sectors. In this respect, data shows that they currently contribute 65 percent of China’s new patent registrations and over 80 percent of new product development. However, financing constraints and difficulties in getting loans from the banks still prevent SMEs from achieving their full innovation potential. In the coming years, the government is likely to launch new preferential tax policies to support SMEs in addressing these difficulties and promote their development.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.
Tax, Accounting, and Audit in China 2015
This edition of Tax, Accounting, and Audit in China, updated for 2015, offers a comprehensive overview of the major taxes foreign investors are likely to encounter when establishing or operating a business in China, as well as other tax-relevant obligations. This concise, detailed, yet pragmatic guide is ideal for CFOs, compliance officers and heads of accounting who must navigate the complex tax and accounting landscape in China in order to effectively manage and strategically plan their China operations.
Managing Your Accounting and Bookkeeping in China
In this issue of China Briefing, we discuss the difference between the International Financial Reporting Standards, and the accounting standards mandated by China’s Ministry of Finance. We also pay special attention to the role of foreign currency in accounting, both in remitting funds, and conversion. In an interview with Jenny Liao, Dezan Shira & Associates’ Senior Manager of Corporate Accounting Services in Shanghai, we outline some of the pros and cons of outsourcing one’s accounting function.
Adapting Your China WFOE to Service China’s Consumers
In this issue of China Briefing Magazine, we look at the challenges posed to manufacturers amidst China’s rising labor costs and stricter environmental regulations. Manufacturing WFOEs in China should adapt by expanding their business scope to include distribution and determine suitable supply chain solutions. In this regard, we will take a look at the opportunities in China’s domestic consumer market and forecast the sectors that are set to boom in the coming years.