China Monthly Tax Brief: September 2023

In our China Monthly Tax Brief for September 2023, we discuss the 16 tax policies implemented or extended by the Ministry of Finance (MOF), State Taxation Administration (STA), and other departments. In addition, China also rolled out several new policy measures to improve the business environment for foreign businesses, including measures to encourage foreign investment, facilitate cross-border data transfer, and cross-border capital transfers.

In September 2023, China’s tax and financial authorities released 16 preferential tax policies to alleviate the tax burden on various sectors of society and industry. These include policies to improve social welfare as well as policies benefiting various industries, such as the agricultural sector and rural areas, culture and education sectors, and the energy sector, among others.

September also saw the release of several new policy documents, both in draft and final form, that aim to improve the business environment for foreign-invested enterprises and attract more foreign investment. Among them are proposals to drastically facilitate the export of data outside of China, and a program to enable free cross-border capital transfers for foreign companies operating in Beijing and the Shanghai Free Trade Zone (FTZ).

Extensions and implementation of 16 tax policies

The 16 tax policies include extensions of existing policies, such as various individual income tax (IIT) policies that were extended until the end of 2027, as well as brand new ones.

The preferential tax policies are summarized in the table below.

Policy		Sector	Details
1	Extension of value-added tax exemption for domestic anti-HIV drugs	Welfare	Continue to exempt production and distribution of domestic anti-HIV drugs from value-added tax (VAT). The policy is in place until December 31, 2027.
2	Extension of relevant tax policies for heating enterprises	Welfare	Exemption of VAT on income from heating fees obtained by heating enterprises from individual residents. Heating companies are exempt from property tax and urban land use tax on the factory land used to provide heating for residents. This policy is extended until the end of the heating period in 2027 (typically until March 15 of each year but subject to change).
3	Exemption of corporate income tax for enterprises that produce and assemble special supplies for disabled people	Welfare	Enterprises that produce and assemble special supplies for disabled people are exempt from corporate income tax (CIT). The policy is in place until December 31, 2027.
4	Extension of the implementation of preferential tax policies for certain national commodity reserves	Welfare	Continue to exempt commodity reserve management companies and their directly affiliated treasury from stamp duty, real estate tax, and urban land use tax. The policy is extended until December 31, 2027.
5	Extension of the Implementation of Certain Administrative Charges and Government Fund Preferential Policies	Welfare	Continue to exempt relevant anti-epidemic drugs and medical devices from registration fees. Local governments can decide independently to exempt, suspend, or reduce taxes on local reservoir resettlement support funds. The policy is extended until December 31, 2027.
6	Extension of reduction of vehicle purchase tax on vehicles	Welfare	Continue to levy vehicle purchase tax at half rate on the purchase of vehicles. The policy is extended until December 31, 2027.
7	Extension of the implementation of preferential tax policies for small loan companies	Agriculture and rural	Interest income from small loans to farmers obtained by approved microfinance companies is exempt from VAT. Only 90% of the income obtained by the above-mentioned microfinance companies is subject to CIT. The loan loss reserves set aside by the above-mentioned microfinance companies at the rate of 1% of the year-end loan balance can be deducted before CIT. The policy is extended until December 31, 2027.
8	Extension of the implementation of preferential policies on property tax and urban land use tax for agricultural product wholesale markets and farmers’ markets	Agriculture and rural	Agricultural product wholesale markets and farmers’ markets are exempt from property tax and urban land use tax. The policy is extended until December 31, 2027.
9	Extension of the VAT policy for border sales of tea	Agriculture and rural	Compressed tea products sold exclusively to border areas with ethnic minority populations that are produced and sold by compressed tea production companies, and compressed tea sold through distribution companies is exempt from VAT. The policy is extended until December 31, 2027.
10	Extensions of the implementation of preferential tax policies for safe rural drinking water projects	Agriculture and rural	Operation and management units that construct drinking water projects are exempt from deed tax, stamp tax, real estate tax, and urban land use tax. Revenue from the provision of tap water to rural residents is exempt from VAT. The above-mentioned operation and management units can enjoy the “three exemptions and three half reductions” CIT treatment, that is: Income from investment and operation of qualified projects by a company are exempt from CIT in the first three tax years from when it first obtains income from production and operation; and CIT will be levied at a half rate from the fourth to the sixth year. The policy is extended until December 31, 2027.
11	Extension of the CIT policy to support rural financial development	Agriculture and rural	Financial institutions’ taxable income from small loans to farmers will be included in the total income at a rate of 90%. When calculating taxable income, 90% of the premium income obtained by insurance companies from providing insurance business for the plantation and cultivation industries shall be included in the total income. The policy is extended until December 31, 2027.
12	Extension of the VAT policy to support the development of cultural enterprises	Culture and education	VAT shall be exempted from income from the sale of film copies, transfer and licensing of copyrights, distribution, and film screening in rural areas by relevant film enterprises that have been approved to engage in film production, distribution, and screening. Income from urban movie screenings provided by general taxpayers can be calculated as a VAT at a rate of 3% according to the simplified tax calculation method. The basic viewing and maintenance fees for digital cable TV and the basic viewing fees for rural cable TV charged by radio and television operating service enterprises are exempt from VAT. The policy is extended until December 31, 2027.
13	Extension of the preferential VAT policy for publicity and culture	Culture and education	Collection and subsequent refund of VAT at a rate of 100% or 50% for certain publications during the publishing process. Exemption of VAT for the wholesale and retail of books. Exemption of VAT on income from ticket sales for scientific popularization entities or scientific popularization activities. The policy is extended until December 31, 2027.
14	Extension of the implementation of real estate tax and stamp duty policies for university student apartments	Culture and education	Property tax and stamp duty exemption for university student apartments. The policy is extended until December 31, 2027.
15	Extension of the preferential resource tax reduction policy for shale gas	Energy	Continue to reduce shale gas resource tax (at the prescribed rate of 6%) by 30%. The policy is extended until December 31, 2027.
16	Extension of the VAT policy for second-hand car sales	Consumer	Second-hand car dealers who sell second-hand cars purchased by themselves are eligible for reduced VAT to 0.5 percent from 3% (according to the simplified tax calculation method). The policy is extended until December 31, 2027.

Observations from Dezan Shira & Associates

The goals of this series of preferential tax policies are multi-faceted. They aim to reduce the tax burden of business units in the target fields and industries and promote their healthy development, improve people's livelihoods and well-being, promote agricultural and rural development, and promote the recovery of green energy and cultural industries.

We have taken note that these tax preferential policies mainly target the reduction of VAT and CIT on specific income of eligible companies, as well as the exemption of property taxes (property tax, deed tax, land use tax) on real estate and land held by these companies.

According to data released by the MOF, eliminating the impact of companies’ applications for VAT refunds in 2022, tax revenue between January and August this year increased by only 0.7 percent year-on-year. Meanwhile, non-tax revenue has fallen for five consecutive months.

However, the growth rate of expenditure on people's livelihoods is relatively high, which reflects the government's focus on social welfare, education, and agricultural and rural development. The continuation of these tax incentives is a positive signal, aiming to create more opportunities in the current economic environment and is expected to provide financial support to companies in related fields, while helping to achieve the government's social and economic development goals.

Increasing R&D expense deduction rate

In order to encourage R&D and innovation in the integrated circuit (IC) and industrial machinery domains, the MOF, STA, and other departments announced an increase to the R&D expense super-deduction ratio for companies in these sectors.

Specifically, if the R&D expenses actually incurred by IC or industrial machinery companies have not formed intangible assets and are included in the current profits and losses, then 120 percent of the actual amount can be deducted before tax during the period from January 1, 2023 to December 31, 2027.

If intangible assets are formed, they can be amortized before tax at 220 percent of the cost of the intangible assets during this time period.

Companies that wish to enjoy this tax policy must verify their eligibility with the National Development and Reform Commission (NDRC) and the Ministry of Industry and Information Technology (MIIT).

The super deduction of R&D expense is also available for general companies, with the following rates currently in place:

For R&D activities that do not form intangible assets and are included in the profits and losses of the current period, an additional 100 percent of the actual amount can be deducted before tax;
For expenses incurred by a company entrusting domestic and external institutions or individuals to conduct R&D activities, they can be included in the entrusting party’s R&D expenses and deducted at 80 percent of the actual amount incurred;
For expenses incurred by a company entrusting an overseas institution to conduct R&D activities, 80 percent of the actual amount incurred will be included in the R&D expenses of the entrusting party for super deduction. However, the portion of the entrusted overseas R&D expenses that exceeds two-thirds of the domestic eligible R&D expenses cannot be included in the super deduction calculation.

See also our article covering eligibility case studies for the R&D super deduction.

In addition to the super deduction policy, in order to encourage the development of scientific R&D, the MOF, Ministry of Commerce (MOFCOM), and the STA introduced several preferential tax policies in September. These policies will be implemented until December 31, 2027.

Policy	Eligible companies	Details
Additional VAT deduction policy for advanced manufacturing enterprises	General taxpayer companies in high-tech industries	The deductible input tax for the current period plus 5% can be used to offset the payable VAT.
CIT policies for deduction of equipment and appliances	All businesses	If the unit value of newly purchased equipment or appliances does not exceed RMB 5 million, it can be included in the costs of the current period in one go and deducted when calculating taxable income, and depreciation will no longer be calculated on an annual basis; and If the unit value exceeds RMB 5 million, companies can choose to apply the accelerated depreciation policy.
VAT policy for equipment purchased by R&D institutions	Qualified domestic R&D institutions and foreign R&D centers	Full VAT refund for purchasing domestic equipment.
Extension of tax policies for technology business incubators, university science parks and maker spaces	Technology business incubators, university technology parks, maker spaces	Continue to exempt property and land for self-use and for incubation targets from property tax and urban land use tax; and Income from providing incubation services is exempt from VAT.

New improvements to the business environment for FIEs

Policies to encourage foreign investment

China has been rolling out more and more documents to promote the concrete implementation of policies to attract foreign investment.

After the State Council issued the Opinions on Further Optimizing the Foreign Investment Environment and Increasing Attraction of Foreign Investment (the “Opinions”) on August 13, foreign-invested enterprises (FIEs) in China have been very concerned with how the 24 measures outlined in these opinions will be implemented, and especially the measures related to government procurement, security, and cross-border investment.

Meanwhile, the two documents also call for encouraging foreign investors to establish foreign-funded R&D centers and jointly carry out technology R&D and industrial applications with domestic companies and undertake major scientific research projects.

Facilitating cross-border capital flows

In September, China took a major step in liberalizing cross-border flows of capital in Beijing and Shanghai.

The two cities simultaneously announced plans to support unrestricted fund transfers related to legitimate foreign investments, thus streamlining the inflow and outflow of capital for FIEs operating in certain areas.This is a significant relaxation of restrictions on foreign capital and is a major reform under the capital account.

In Shanghai, the implementation plan has already been passed and came into effect retroactively from September 1, 2023. The new policy will apply to the Shanghai Pilot FTZ and the Lingang New Area, both of which are situated in Shanghai’s eastern Pudong District.

Meanwhile, Beijing is soliciting feedback from the public on its plan until October 19, 2023. The policy would be implemented city-wide.

Facilitating reinvestment

The draft Beijing FI Regulations also seek to encourage foreign-invested enterprises to reinvest within the country. To this end, they propose exploring the implementation of exempting FIEs from foreign exchange registration for reinvestment, which is a requirement for FIEs in China.

They also call for municipal departments governing development and reform, commerce, economy and information technology, and science and technology to provide FIEs with the same support policies and resource guarantees for profit reinvestment and new foreign investment.

The China Monthly Tax Brief is a new series produced in association with the experts at Dezan Shira & Associates’ China practice.