Small businesses play a pivotal role in driving China's economic growth. Due to their smaller scale and limited financial resources, these businesses often face challenges in making large-scale investments. To address this, China is actively cultivating an enabling business environment that promotes the expansion of small enterprises.
It has taken decisive steps to mitigate the financial burdens faced by these businesses and address the challenges they encounter in securing financing. Especially in 2023, the government has continued to implement favourable tax policies, particularly in the realm of tax incentives, to provide small businesses with greater support and benefits, aiming to assist them in recovering from the impacts of the COVID-19 pandemic.
On 2 August, 2023, China's Ministry of Finance and State Taxation Administration made a joint announcement, regarding the extension of preferential tax policies for small businesses. These policies, originally designed to provide support and incentives, will now be in effect until the end of 2027. The extended tax policies include:
- From 1 Jan 2023 to 31 Dec 2027, the IIT is halved for individually owned businesses with annual taxable income not exceeding CNY 2 million (roughly taxable income/profits of USD280k per annum).
- From 1 Jan 2023 to 31 Dec 2027, resource tax, urban maintenance and construction tax, property tax, urban land use tax, stamp duty tax, farmland occupation tax, education surcharge, and local education surcharge (six taxes and two fees) are halved for small-scale taxpayers, small and low-profit enterprises (SLPE), and individually owned businesses. Additionally, for loan contracts signed between financial institutions and small enterprises and micro-enterprises, these shall be exempt from stamp duty.
- Interest income derived from small loans granted by financial institutions to small-scale taxpayers, SLPEs, and individually owned businesses is exempt from VAT.
- From 1 Jan 2023 to 31 Dec 2027, all SLPEs (annual taxable income below CNY 3 million, employee below 300, asset below CNY 50 million) will be subjected to a 20 per cent CIT rate on 25 per cent of their taxable income, calculated for the portion that does not exceed CNY 1 million. For example, if the taxable income is CNY 1 million, then CNY 250,000 will be taxed at 20%, so an effective tax rate of 5%.
- Small-scale taxpayers, SLPEs, and individually owned businesses that have already legally enjoyed the reduction of six taxes and two fees can cumulatively enjoy the preferential policies stipulated in policy two listed above.
- The related taxes already paid prior to the date of the announcement can be offset against the taxpayer's future monthly tax liabilities or refunded.
China recognises the significant role played by small businesses in driving economic growth. However, they often face challenges in accessing financing and making large-scale investments. The government has taken proactive measures to support their growth, and in 2023, the government further bolstered its commitment by extending six tax policies for small businesses until the end of 2027, including VAT exemption for certain interest income, reduced taxes and fees, and exemption from stamp duty for specific taxes. For more information on the tax policies, please contact Acclime China.
1 Continued Optimisation of Multiple Tax Incentives Policies for the Development of SLPEs: https://www.gov.cn/zhengce/202308/content_6896550.htm
2 Announcement from the Ministry of Finance and the State Taxation Administration Regarding Tax Policies to Support Financing for SLPEs: http://www.chinatax.gov.cn/chinatax/n359/c5210476/content.html