Financial incentives offered to businesses make a significant impact on decision-makers. Sometimes, these are even the deciding factors determining whether an international company will embark on a China market entry project or not. In China, tax incentives are a means that the government utilizes to encourage in-market investment, and is able to re-route these investments to aid their wider national economic goals. Local and foreign-owned companies in the country, which meet the required criteria and can provide supporting documents, are eligible for a variety of tax benefits in China, divided into the following categories:
Category: Type of tax
The benefit: Extension of the range of entitlement to tax benefits, in 18 different taxes
Examples: Companies paying Corporate Income Tax (CIT) in China can enjoy 69 different tax incentives based on pre-defined categories, from tax credits, through reduced CIT rates, to full exemption. Preferential tax policies are also applicable in VAT payments, Individual Income Tax (IIT), and more.
Category: Location
The benefit: Encouragement of investments in developing regions, and in special economic zones across China
Examples: Companies that are operating in one of China’s Encouraged Industries and are based in China’s western regions, are eligible for a reduced CIT rate of 15% only. Companies located in special economic zones in Shanghai, Shenzhen, Fujian, and Hainan also qualify for this incentive.
Category: Type of sector
The benefit: Development of selected industries, according to national priorities
Examples: Companies in the semiconductor, IC, and software industries can enjoy multiple CIT, VAT, and import duty favorable policies. Companies in the energy conversion industry can enjoy VAT exemption in addition to CIT incentives.
Category: Size of business
The benefit: Incentives for small businesses in the competitive Chinese market
Examples: Small businesses (whose annual income does not exceed RMB three million) have enjoyed a low Corporate Income Tax rate (2.5%) since 2020, up to a revenue of RMB one million.
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Tax incentives for small businesses in China
Based on the official tax laws definitions, around 90% of the businesses in China are classified as small businesses. Therefore, the Chinese government sees small businesses as the engine for the country’s continued economic growth. By this logic, China seeks to create a friendly business environment for small businesses, aiming to reduce the financial burdens they face and encourage new investors to register a company in China and establish a foothold in their respective markets.
The following is a summary of the main tax benefits available to small businesses in China in 2022:
Reduced CIT rate
The general CIT rate in China is 25%. In practice, small businesses can now benefit from lower CIT effective rates:
- 2.5% tax on income up to one million RMB (in effect until December 31st, 2022)
- 5% tax on the amount of annual income between one and three million RMB (in effect until December 31st, 2024)
Extension of the VAT exemption
Qualified small businesses that are considered small-tax payers, with an annual taxable income that doesn’t exceed five million RMB, are entitled to a preferential VAT policy. That said, businesses whose monthly sales turnover is lower than 150,000 RMB (or whose quarterly turnover is lower than 450,000 RMB), and can verify it through supporting documents (such as China tax invoices) are exempt from paying VAT. In addition, small-scale taxpayers who were qualified for a reduced 3% VAT rate on their taxable sales income will now be exempted from VAT payments. Please note:
- These benefits remain in effect until December 31, 2022.
- VAT on export is exempt in China. If you are still charged, you may apply for a VAT refund in China
Cut in IIT payment for individually-owned businesses
Entrepreneurs and self-employed business owners, whose annual income doesn’t exceed one million RMB, are entitled to an IIT relief, in the form of a 50% cut of their payable IIT based on the prevailing incentives.
With that in mind, it’s worth mentioning that in 2024 a tax reform is expected to come into effect, which will increase the tax burden paid by employees, and increase the hiring costs of foreign employees in China.
Our services assist international companies in the Chinese market. Contact usVAT exemptions for banks, for the sake of small businesses
In order to incentivize financial institutions to keep making loans and offering assistance programs for small businesses, banks will be exempt from paying VAT on their interest incomes. In addition, small businesses and banks who sign the loan contracts will be exempt from paying stamp duties. Both benefits remain effective until December 31st, 2023.
Since the Foreign Investment Law took force in January 2020, tax benefits are given equally across the board to small businesses in China, regardless of the investor’s identity, and so long as the business’s activity does not feature in the Negative List (industries in which foreign investments are restricted, or prohibited).
2022’s 1st quarter is not over yet, so it’s prime time to capitalize on the momentum and check if you can improve your company’s tax rate in China or can enjoy some of the incentivized benefits on offer. Get in touch for help with your inquiries and read more about financial services in China.
