China Launches New Preferential Tax Policies for Small Low-Profit Enterprises

May 29, 2015 Posted by China Briefing Reading Time: 4 minutes

By Stephen O’Regan
International Business Advisory, Dezan Shira & Associates

In the past eight years, China has taken a series of measures to aid in the development of small and medium-sized enterprises (SMEs) such as establishing special support funds, reducing corporate income tax (CIT) and value-added tax (VAT) rates, clearing some administrative fees, and allowing special social security policies in certain enterprise. The development of SMEs contributes over 60 percent to China’s total GDP growth and have become a major drive of the country’s economic advancement. These developments are aimed to solve the capital shortage problem that resides in most SMEs and promote more investment and business.

In China, small and low-profit enterprises refer to enterprises engaged in industries which are not prohibited or restricted by the government and meet the following conditions:

For industrial enterprises with annual taxable income not exceeding RMB 300,000, total employees not exceeding 100 person, and total assets not exceeding RMB 30 million; and
Other enterprises with annual taxable income not exceeding RMB 300,000, total employees not exceeding 80 person, and total assets not exceeding RMB 10 million.

China’s State Administration of Taxation recently released the “Announcement on Expanding the Scope of Small Low-profit Enterprises Eligible for CIT Reduced by Half Policy (SAT Announcement [2015] No. 17) and the Cai Shui [2015] No. 34. According to the two documents, all types of small low-profit enterprises that meet the requisite conditions are entitled to the preferential income tax policies.

Small and low-profit enterprises with a taxable income not exceeding RMB 200,000 are allowed to pay corporate income tax at the rate of 20 percent on only 50 percent of their taxable income. Specifically, if a small low-profit enterprise prepays CIT based on its actual profit for the current year, and the accumulative actual profit at the time of making the prepayment is less than RMB 200,000, it is entitled to the Halved Tax Policy; and if such accumulative actual profit exceeds RMB 200,000, the enterprise is no longer entitled to the Halved Tax Policy. If the small low-profit enterprise prepays CIT for the current year based on the quarterly (or monthly) average of the taxable income for the previous year, it is entitled to the Halved Rate Policy.

Such small low-profit enterprises will no longer need to get the approval from tax authorities and they may enjoy the preferential income tax policies at the time of quarterly or monthly prepayment of the CIT. However, for small low-profit enterprise which are subject to tax collection at a fixed amount, the tax authorities will make adjustment to their taxable amount and they need to pay the CIT based on the original measures. Please note that non-resident enterprises which are getting income earned from commercial operations conducted within Chinese territory are not included within the scope of certain tax break policies.

Further, small low-profit enterprises are no longer required to file relevant companies’ information at the time of prepayment and final settlement of corporate income tax. Previously, small low-profit enterprises were required to provide the information about their number of employees and total assets at the time of prepayment declaration.

The preferential policy is effective from January 1, 2015 to December 31, 2017.

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