Tax Incentives in China – An Updated Summary for 2024

April 10, 2024
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Financial incentives offered to businesses make a significant impact on decision-makers. Sometimes, these are even the deciding factors that determine whether or not an international company will embark on a China market entry project.

Local and foreign-owned companies in the country that meet the required criteria and can provide supporting documents are eligible for various tax benefits in China. Keep reading to find out more; perhaps your business can capitalize on one of them…

Tax incentives in China – An entry ticket to the world’s second-largest market

The concepts of taxation and tax incentives are pretty straightforward to anyone in any kind of business worldwide, and China is no different in that regard. That said, when discussing tax incentives in China, there’s one thing to clarify. Preferential tax policies in China are a means by the government to encourage in-market investment into areas that align with national economic goals. Put it differently, tax incentive policies might change yearly based on the government’s changing agendas and priorities.

This is not to deter international companies from doing business in China. On the contrary. While it may be thought that China has a “secret motive”, the truth is that China’s tax incentive policies are strategic tools designed to attract and foster partnerships with international businesses. Therefore, international companies should view these policies as opportunities to thrive in this rapidly evolving global market, rather than as a sole Chinese interest.

How do tax incentives in China work?

Taxes in China primarily fall into two categories: corporate taxes (taxes paid by employers) and individual taxes (taxes paid by employees). Within these categories, tax incentives are often further classified into three main types:

  1. Sector-based tax incentives
  2. Location-based tax incentives
  3. Business size-based tax incentives

In this article, we will highlight some of the key tax incentives most relevant to PTL Group’s clients, specifically international technological B2B and manufacturing companies.

Types of tax incentives for companies in China

Corporate Income Tax (CIT) is paid by international companies who are active in the Chinese market and generate a China-sourced income. Generally speaking, there is a fixed standard CIT rate of 25%; however, eligible companies can enjoy several CIT incentives.

Sector-based CIT incentives

As part of China’s ambition to boost its local technological capabilities and transition towards digitalization, significant tax incentives are anticipated for international companies engaged in these sectors. For instance, since January 1st, 2020, key software and IC enterprises have benefited from a lowered CIT rate of 10%. Qualified new/high-tech enterprises, along with eligible enterprises involved in pollution prevention control also enjoy a reduced CIT rate of 15% (in effect for the latter until December 31st, 2027). Companies in the agricultural technology industry are exempt from CIT altogether.

Location-based CIT incentives

Those mainly apply to companies registered in China’s developing regions and special economic zones. For example, companies 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% (valid until December 31st, 2030). Enterprises involved in substantial production or R&D activities in key industries in the Lingang New Area of the Shanghai Pilot Free Trade Zone may also qualify (if meeting several criteria) for a lowered 15% CIT rate for their first five years of operation. The same goes for companies from the relevant criteria in the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, a benefit remaining in effect until December 31st, 2025.

Business size-based tax incentives – Tax benefits for small businesses in China

Business size-based tax incentives are usually offered to small and low-profit companies, with an annual taxable income of up to three million RMB and no more than 300 employees. According to OECD records, micro and small enterprises constituted 98.5% of Chinese firms, contributing over 60% to the total GDP in 2020. 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.

Some of the tax benefits offered to small businesses in China are as follows:

  • CIT incentives: Small businesses are subject to an effective CIT rate of 5%, regardless of their industry or location. This benefit will remain in effect until December 31st, 2024.
  • VAT incentives: Small-scale taxpayers subject to a 3% VAT rate can enjoy a reduced VAT rate of 1%. This benefit will remain in effect until December 31st, 2027.

Read more on VAT rebates in China.

Types of tax incentives for foreign employees in China

Individual Income Tax (IIT) is paid by international expats in China, with the tax amount being determined based on the individual’s time of residence in China and their income level. Overall, IIT incentives are targeted towards high-end international talents who are urgently needed and in short supply in China. These incentives primarily focus on individuals from tech and advanced industries by default. Hence, there is no separate sector-based category when it comes to tax incentives for individuals.

However, it’s noteworthy that these IIT incentives are not applicable nationwide, but only in certain areas. Specifically, a reduced effective IIT rate of 15% is offered to eligible foreign talents in the Shanghai-Lingang area, certain areas in Beijing, the Greater Bay Area (GBA), the Hunan-Changsha area, the Hainan Free Trade Port, and more. In some of these areas (Hainan, GBA), some benefits extend until the end of 2035.

Take this tax incentive opportunity

2024’s second quartet has already started, so it’s prime time to capitalize on the momentum and check whether you can improve your company’s tax breaks in China or enjoy some of the benefits. Read more about financial services in China and get in touch for help with your inquiries.

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