On January 9th, 2019, China's State Council introduced tax cuts specifically designed for SMEs and low-profit enterprises. This move from the Chinese government aims to stabilize the economy amidst a slowing economy, to support local employment and developments such as the China-US Trade War affecting its economy.
Corporate Income Tax
According to the Corporate Income Tax (CIT) Law, which became effective from 1 January 2008, all enterprises in China are subject to CIT. Both local and foreign companies are subject to a uniform tax rate of 25 per cent. Under the Corporate Income Tax Law some organizations may experience a preferential income tax rate of 15 per cent, if they qualify as high-tech or technology advanced services companies.
Corporate Income Tax is calculated based on revenue, minus costs, operating tax and several expenses. As a result, CIT is calculated according to the following formula:
Expanding the scope of preferential CIT
In line with previous legislation, companies in China with less than RMB 1 million in taxable income were exempted from paying Corporate Income Tax over 50% of their taxable income, whereas the other 50% would only be taxed at a 20 per cent CIT rate.
The announcement by the State Council expanded these preferential policies for SMEs and low-profit enterprises. Where companies in China now have less than RMB 1 million in taxable income, they are exempted from paying CIT over 75% of their taxable income and will pay the 20 per cent CIT rate over the remaining 25% of taxable income. This would mean that taxable income up to 1 million RMB is effectively subject to 5 per cent Corporate Income Tax.
Additionally, the new announcement also stated that if companies have between RMB 1 million and RMB 3 million of taxable income, they will be exempted from paying CIT over 50% of their taxable income and again the remainder of taxable income is subject to the 20 per cent CIT rate. Similarly, this would mean an effective 10 per cent Corporate Income Tax rate.
Value Added Tax
Value Added Tax (VAT) is charged on the supply of goods and provision of services in China, as well as the import of goods into China. Because of the credit system, VAT is borne by the final consumer.
VAT taxpayers are categorized into general taxpayers and small-scale taxpayers based on their annual taxable sales. Industrial taxpayers with annual sales exceeding RMB 5 million are recognized as general taxpayers. From 28 March 2018 onward, VAT rates for general taxpayers have been simplified to 6 per cent, 10 per cent and 16 per cent.
Small-scale taxpayers are subject to a VAT rate of 3 per cent, but they are not able to subtract input VAT from output VAT. They are also not able to print VAT deductible invoices by themselves (and instead have to visit the tax office to print them).
Raising of VAT thresholds
The announcement of the State Council also raised the VAT exemption amount for small-scale taxpayers such as micro enterprises, self-employed individual industrial and commercial household enterprises. The VAT exemption was raised from monthly sales up to RMB 30.000 to up to RMB 100.000.
Other tax incentives
Also, provincial (autonomous regions and municipalities) governments may choose to lower local taxes such as Resource Tax, Urban Maintenance and Construction Tax, Stamp Duty, Urban Land Use Tax and Education Surcharges and local Education Surcharges on small-scale VAT taxpayers up to 50%.
Finally, the announcement expanded the preferential policies for investing in technology start-ups by making more venture capital companies and angel investors eligible for tax preferences.
These tax reduction policies have become effective from 1 January 2019 onward already, and the implementation period is currently set for the upcoming three years. This is good news for SMEs in China and we still expect the tax authorities to release in the future further information to support the implementation of these new policies.
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