In this monthly China tax brief, we highlight policies and measures announced or to be implemented in February 2024 for clarifying tax compliance, supporting businesses, encouraging headquarters, expanding market access, and attracting talents.
STA released document clarifying matters related to the annual IIT reconciliation for the year 2023
On February 1, 2024, the State Taxation Administration (STA) issued the Announcement on Matters Relating to the Final Settlement of Individual Income Tax on Consolidated Income for the Year 2023 (STA Announcement [2024] No.2), clarifying matters related to the annual individual income tax (IIT) reconciliation for the year 2023.Annual IIT reconciliation, or annual IIT settlement, is a process applied to individual taxpayers on their comprehensive income (an individual’s combined income of wages and salaries, remuneration from labor services, author’s remuneration, and royalties), to make sure their IIT paid in the previous tax year is accurate.
Key points of the STA Announcement [2024] No.2 are summarized as follows:
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Key Points of the Annual IIT Reconciliation for the Year 2023 |
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| Time | March 1, 2024 – June 30, 2024.
· Phase I: March 1 to March 20, 2024 · Phase II: March 21 to June 30, 2024 For taxpayers who need to make the annual IIT reconciliation during phase I, they need to make an appointment through the IIT App on any day during the aforesaid timeframe from February 21 (6:00-22:00).
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| Applicable scope | A resident taxpayer who falls into either any of the following circumstances is required to carry out annual IIT reconciliation:
· Where the prepaid tax amount exceeds the tax payable amount in the final settlement and the taxpayer applies for a tax refund; or · Where the comprehensive income obtained in 2023 exceeds RMB 120,000 (approx. US$16,700), and the tax amount to be made up in the final settlement exceeds RMB 400 (approx. US$56).
Where a taxpayer failed to declare or under-declare his/her comprehensive income for the year 2023 due to an error in the application of an income item or failure of the withholding agent to perform its withholding obligation, he or she is required to make a final settlement truthfully according to the law. |
| Exemptions | Circumstances under which the annual IIT reconciliation is not required:
· Where the taxpayer has to make up tax in the final settlement, but his/her comprehensive income does not exceed RMB 120,000 in the year; · Where the tax amount to be made up does not exceed RMB 400 in the final settlement; · Where the prepaid tax amount is consistent with the tax payable amount in the final settlement; and · Where the taxpayer satisfies the criteria for a tax refund in the final settlement but does not apply for a tax refund. |
| Notable changes | · In 2024, taxpayers are no longer required to confirm their entrustment relationship with entrusting entities before April 30. This means that taxpayers who need to entrust their employer to do the annual settlement will have more adequate time to deal with the matter.
· In 2024, the STA Announcement [2024] No.2 clarifies the method, venue, and time of the consolidated declaration of multiple equity incentives. If a taxpayer obtains equity incentives from the same employer on multiple occasions within a tax year, the employer shall compute and withhold tax on a consolidated basis. If a taxpayer obtains equity incentives from different employers within a tax year, he/she may provide the relevant information on equity incentives obtained from his/her previous employer to his/her current employer, which shall compute and withhold tax on a consolidated basis, or complete consolidated filing of tax return with taxation authorities between 1 March and 30 June of the following year. · In 2024, the provisions on the service of relevant documents for failure to file in time or insufficient make-up payment are clarified. If the taxpayer needs to pay supplementary tax after the final settlement, the taxpayer must complete the declaration and pay the tax within the prescribed time. If the taxpayer fails to declare on time or pay insufficient, the tax authorities will take measures according to law, including sending tax documents to the taxpayer to correct, and through the tax APP and website and other electronic channels to the taxpayer who has signed the Confirmation of Electronic Service of Tax documents, or through other means to the taxpayer who has not signed the confirmation. If the taxpayer fails to pay the tax on time, the tax authority will add a late fee according to law, and record the situation in the taxpayer’s IIT Records. |
DSA observations:
When handling the annual IIT settlement for the year 2023, taxpayers should exercise caution, ensuring the accuracy, truthfulness, and completeness of the information submitted to avoid tax-related issues arising from inadvertent errors. It is essential to properly retain all relevant tax records and supporting documents.If a taxpayer needs to delegate the annual settlement and payment to their employer, they should confirm the delegation relationship in advance and provide necessary information. For individuals who have received multiple stock incentives within a year and have not had their withholding taxes consolidated by their employer, they must individually declare the consolidated income to the tax authorities between March 1 and June 30 of the following year after obtaining the stock incentives.
Additionally, it is crucial to stay informed by monitoring official documents and notifications issued by the tax authorities through the IIT App and e-tax website, promptly addressing any related matters. If necessary, seeking assistance from professional experts can help manage annual settlement-related affairs.
On the other hand, withholding agents (employers) should keep abreast of the latest developments in tax regulations and policies, continually updating and refining their internal annual IIT settlement procedures. Regarding the consolidation reporting requirements for multiple stock incentives, employers should establish clear internal policies and operational processes while maintaining effective communication and management mechanisms. Adequate communication with employees, specifying deadlines for data submission, and timely notifications after processing are essential. Conducting employee training sessions emphasizing key aspects of annual settlement and the consolidation reporting process for stock incentives is also advisable. Lastly, employers should properly retain the tax-related information and supporting materials provided by their employees.
For more details about the requirements and procedures of annual IIT reconciliation in 2024, please read our article here.
State Council released draft document proposing a 3-year transition period to adapt to the new rules on registered capital in China
To provide guidance and ensure the implementation of the new regulations in the amended Company Law on the term of payment for subscribed capital, the State Council has released a draft version of the Provisions on the Registered Capital Registration Management System (the “draft provisions”) for public feedback until March 5.|
Key Points of the Provision on the Registered Capital Registration Management System (draft) |
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| Capital contribution requirement | Shareholders of a Limited Liability Company (LLC) must pay their subscribed capital in full within five years of the company’s establishment.
Promoters of a joint-stock company established by initiation or private placement are also required to pay in full the shares subscribed by them. |
| Certificate of capital verification | A joint stock limited company established by public offering is required to submit a capital verification certificate, while other types of companies are not required to submit one. |
| Transitional period for existing companies | For companies established before the amended Company Law takes effect, with a subscribed capital payment term (“contribution period”) exceeding five years, the transition period will extend from July 1, 2024, to June 30, 2027:
· If an LLC is established before July 1, 2024, but the remaining contribution period for its shareholders is less than five years from July 1, 2027, the company does not need to make any adjustments during the transition period. · If the remaining contribution period exceeds five years, then it must be adjusted to be within five years during the transition period. For joint stock companies established before the implementation of the amended Company Law, the funds for subscribed shares must be fully paid within the three-year transition period (before June 30, 2027). |
| Abnormal investment and adjustment | If a company is established before July 1, 2024, and has a contribution period exceeding 30 years or total subscribed contributions exceeding RMB 10 billion (US$1.4 billion), the company registration authority may assess the authenticity of the registered capital.
If it is determined that there are significant anomalies in the contribution period or amount of subscribed capital, the company may be required to adjust the contribution period and amount within six months. The adjusted contribution period cannot exceed five years from July 1, 2027. |
| Simplified capital reduction procedures | If a company that is established before July 1, 2024, wishes to apply to reduce registered capital but does not reduce the actual paid-in capital during the transition period, it can do so through a comparatively simpler process – by announcing the reduction to the public through the National Enterprise Credit Information Publicity System for a period of 20 days. |
| Exceptions | Some companies established before July 1, 2024, that are involved in strategic or critical fields may be exempted from having to adjust the contribution period and can continue with their original payment schedule if given consent by the relevant department of the State Council. These include companies that:
· Undertake major national strategic tasks; · Are related to the national economy and people’s livelihoods; or · Are involved in projects of national security or public interest. |
Shanghai amended measures on the management of funds for the development of regional headquarters of MNCs
On February 5, Shanghai Municipal Commission of Commerce and the Municipal Bureau of Finance jointly released the revised Measures for the Management of Development Funds of Regional Headquarters of Multinational Corporations in Shanghai (2024). The measure aims to promote the development of regional headquarters and research centers established by multinational corporations (MNCs) in this city, thereby enhancing the quality of foreign investment.|
Key Points in the Measures for the Management of Development Funds of Regional Headquarters of Multinational Corporations in Shanghai (2024) |
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| Eligibility | · Eligible regional headquarters of multinational corporations, headquarters of MNCs, and global research centers can receive support.
· Declaring companies must meet specific economic and social performance criteria, maintain sound financial management systems, have a good financial standing, and not be listed as subjects of joint disciplinary action for dishonesty. |
| Supporting measures | · Startup assistance: For regional headquarters or global research centers of MNCs certified in Shanghai after November 1, 2022, a startup assistance of RMB 5 million will be provided, distributed over three years.
· Rental subsidy: Newly certified regional headquarters or global research centers of MNCs will receive a three-year rental subsidy based on office area and rental standards. · High-level incentive: Senior executives from qualified regional or business unit headquarters, permanently residing in Shanghai, are eligible for a one-time incentive of RMB 3 million. · Operational award: Multinational corporations’ regional or business unit headquarters meeting the requirements for paid-up registered capital and achieving a certain annual turnover will receive a one-time award. The award amount varies based on different revenue segments. · Capital increase bonus: Foreign investment projects aligned with the city’s industrial development goals, which increase actual foreign investment by no less than US$30 million annually, can receive a one-time capital increase bonus of RMB 2 million. |
| Application and procedures | · Enterprises should submit applications to the district commerce authorities based on the declaration notices issued by the Municipal Commission of Commerce.
· After preliminary review by the district commerce authorities, they report to the Municipal Commission of Commerce, which then delegates third-party organizations for further examination and reevaluation. · The Municipal Commission of Commerce, in collaboration with the Municipal Finance Bureau, will notify each district of the audit results1. |
DSA observation:
These policies all indicate that Shanghai is committed to creating an environment more conducive to foreign investment development. They provide financial resources and policy support to MNCs, aiming to encourage and attract more companies to establish regional headquarters and research centers in Shanghai. This, in turn, contributes to the economic and social development of the city.Shanghai unveils 117 work tasks to further open up the Shanghai FTZ
On February 6, 2024, the Shanghai Municipal People's Government the Plan for the Implementation of the General Plan for Comprehensively Aligning with International High-Standard Economic and Trade Rules and Pushing forward the High-level Institutional Opening-up of the China (Shanghai) Pilot Free Trade Zone (Shanghai FTZ).
The Plan outlines 117 tasks in nine aspects, specifies details on electronic payment, cross-border transmission of financial data, fintech, cross-border asset management, telecommunications services, import and export of goods, commercial cryptography, logistics business models, digital technology applications, intellectual property protection, and government procurement.
In particular, the Plan set the following tasks:
- Steadily expanding institutional opening: Over the next three years, establish an institutional framework and regulatory model that aligns with internationally high-standard economic and trade rules.
- Enhancing the level of liberalization and facilitation in goods trade: Implement multiple measures to promote goods imports, encourage the development of commercial encryption industries, and optimize telecommunication services, thereby enhancing trade facilitation.
- Accelerating the expansion of openness in services trade: Facilitate openness in areas such as finance and the digital economy, including encouraging the provision of electronic payment services and supporting cross-border transmission of financial data.
- Pioneering the implementation of high-standard digital trade rules: Drive the adoption of high-standard digital trade rules related to digital identity authentication, digital technology applications, and data sharing.
- Strengthening intellectual property protection: Enhance protection for trademarks and geographical indications, while improving the efficiency of intellectual property information services platforms.
As per the Circular, from April 1, 2024 to March 31, 2025, the contract notes related to offshore resale business conducted by enterprises registered in the Shanghai FTZ and the Lin-gang Special Area will be exempted from stamp tax. In this context, offshore resale business refers to transactions where a resident enterprise purchases goods from a nonresident enterprise and subsequently resells them to another nonresident enterprise, all without involving the movement of goods through China’s customs territory.
DSA observation:
These measures aim to achieve institutional openness in a broader and deeper scope within the Shanghai FTZ. It seeks to create a national demonstration area for institutional innovation and foster new international cooperation and competitive dynamics in key sectors. This effort will contribute to enhancing the ease of trade and investment in the Shanghai FTZ, aligning its institutional framework with international standards, promoting the integration of digital economy rules with global practices, and ensuring effective risk management while maintaining openness. Overall, it strengthens Shanghai FTZ’s participation in shaping international rules.The 2024 Catalogue for Guiding Industry Restructuring took effect from February 1
On December 29, 2023, China’s National Development and Reform Commission (NDRC) revealed the upcoming 2024 Edition of the Catalogue for Guiding Industry Restructuring (referred to as the “Catalogue”), which took effect on February 1, 2024. This updated edition serves as a comprehensive guide, intricately charting the strategic roadmap for the restructuring of diverse industrial sectors across China. It also signifies a step towards aligning industries with evolving economic goals and priorities.A comparative analysis with the previous 2019 version reveals a notable decrease of 473 entries in total – a significant reduction of 469 entries in the Encouraged category, a modest increase of 16 entries in the Restricted category, and a decrease of 20 entries in the Obsolete category. The decline in the number of entries within the Encouraged category primarily stems from a strategic consolidation and integration approach regarding industry categories, aimed at unifying entries that share similar characteristics or objectives. This strategic move aims to simplify and enhance the effectiveness of the Catalogue, grouping priority investment areas for easier comprehension.
China provides tax incentives for the import of equipment and technology related to domestic investment projects listed in the “encouraged” category. The specific details include:
- For projects falling under the encouraged category, the import of self-use equipment, associated technology, and spare parts within the total investment amount is exempt from customs duties. Import value-added tax (VAT) is levied according to regulations.
- Investment regulatory authorities and customs offices directly in charge will issue project confirmation certificates and notices based on the Catalogues These documents specify the encouraged industry policy items and nature of the project.
- Domestic investment projects approved, ratified, or filed before February 1, 2024, falling within the scope of the encouraged category in the 2024 Catalogue can undergo tax reduction and confirmation procedures.
- Similarly, projects not falling under the encouraged category in the listed in the 2024 Catalogue, but falling under the encouraged category in the 2019 Catalogue, are also eligible for tax benefits. However, the tax already paid is not refundable.
DSA observation:
The implementation of the new catalogue reflects policy continuity. It provides a transition period for encouraged projects listed in the 2019 catalogue, ensuring policy stability and minimizing adverse effects on business operations. The policies of exempting customs duties can reduce the costs of encouraged projects, enhance their market competitiveness, and align with the country’s macroeconomic control needs.For more information about this updated Catalogue for Guiding Industry Restructuring, please read our China Briefing article here.
15% CIT rate was extended to Hetao Shenzhen-Hong Kong Science and Technology Innovation Cooperation Zone
The Shenzhen Municipal Finance Bureau, State Administration of Taxation (STA), and Shenzhen Municipal Taxation Bureau have announced that the reduced 15 percent corporate income tax (CIT) rate for eligible businesses will be applied to certain areas of the Hetao Shenzhen-Hong Kong Science and Technology Innovation Cooperation Zone (HTCZ). The standard CIT rate in China is 25 percent. (Cai Shui [2024] No. 2)- Moreover, the authorities also announced a preferential individual income tax (IIT) policy for Hong Kong residents working in the Shenzhen portion of the HCTZ (hereinafter the “Shenzhen Park), in an effort to encourage talent exchange. (Cai Shui [2024] No. 5)
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Key Points of the Cai Shui [2024] No. 2 |
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| Preferential policy | Qualified companies that are operating in one of the encouraged industries within the Futian FTZ will be eligible for the reduced 15% CIT rate. |
| Qualifications | companies must meet the following conditions:
· At least 60 percent of its total income is derived from one of the encouraged industries in the Catalogue of Preferential Corporate Income Tax in the Shenzhen Park of the HTCZ (the “Catalog”); and · Have “substantive operations” in the Futian FTZ, which means that the actual managing organization of the company must be located within the Futian FTZ and exercise substantial and comprehensive management and control over the company’s production, operations, personnel, accounts, property, and so on. |
| Management method | · For enterprises whose head office is located in a specific closed area of the Shenzhen Park, only qualified head office and branch income are subject to a 15% tax rate.
· For enterprises whose head office is located outside a specific closed area of the Shenzhen Park, only qualified branch income is subject to a 15% tax rate. |
| Duration | January 1, 2023 (retrospective) – December 31, 2027 |
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Key Points of the Cai Shui [2024] No. 5 |
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| Preferential policy | · The preferential IIT policy applies to residents of Hong Kong who are working in the Shenzhen Park.
· Under the policy, Hong Kong residents can be exempted from paying the portion of their IIT that exceeds the tax they would have paid in Hong Kong. · Unlike the CIT policy, this policy is applicable across the whole of the Shenzhen Park, not just in one area within the park. |
| Income scope | Income eligible for the preferential IIT rate includes the comprehensive income derived within the Shenzhen Park (including wages, remuneration for labor services, royalties, and franchise royalties), business income, and talent subsidies identified by local governments. |
| Application procedures | Taxpayers can enjoy the preferential IIT policy when settling their annual individual income tax with the tax authorities in the Shenzhen Park. |
| Duration | January 1, 2023 (retrospective) – December 31, 2027 |
DSA observation:
The CIT and IIT measures are designed to attract more companies and individuals to participate in the construction of the Hetao Shenzhen-Hong Kong Science and Technology Innovation Cooperation Zone. By reducing the tax burden, it encourages and promotes the enthusiasm and innovation of enterprises and residents within the park. For both businesses and individuals, this is favorable news.For more information about the tax incentives offered in the Hetao zone, please read our China Briefing article here.
