China Monthly Tax Brief: July 2024

In this China Monthly Tax Brief for July 2024, we highlight significant developments in taxation for both businesses and individual taxpayers.

• The MOF and STA issued a new preferential CIT incentive, allowing taxpayers to enjoy a 10 percent CIT credit for qualified investment in the digital and intelligent transformation of special equipment.
• The preferential IIT policy for dividends from NEEQ-listed companies has been extended for another three years to 2027.
• The Guidelines for Major Tax Incentives on Corporate Mergers and Acquisitions have been released, clearly defining the applicable entities, criteria, and required documents.
• The NDRC and the MOF have intensified support for large-scale equipment upgrades and trade-in of consumer goods.

Promoting green and smart development: CIT Incentives for digital transformation of specialized equipment

China’s Ministry of Finance (MOF) and State Tax Administration (STA) have issued a new preferential corporate income tax (CIT) incentive for companies investing in the digital and intelligent transformation of certain types of equipment. To be eligible for the incentive, companies must invest in the digital and intelligent transformation of equipment related to energy and water conservation, environmental protection, and safe production.

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The new tax incentive aligns with a State Council Action Plan, released in March 2024, which aims to accelerate the renewal of large-scale equipment and consumer goods, promoting high-quality development and driving investment and consumption for long-term benefits.

The key details of this CIT incentive for green and digital transformation are summarized as below.

Insights from Dezan Shira & Associates:

Enterprises can benefit from these CIT incentives by digitally and intelligently upgrading specialized equipment for energy conservation, water conservation, environmental protection, and safety production.

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Enterprises need to proactively plan their technology upgrade paths to ensure that transformation projects meet policy requirements and fully enjoy tax credits. This involves selecting appropriate equipment and technology paths and ensuring that the transformed equipment meets the conditions specified in the catalog.

Additionally, enterprises should strengthen financial management and accounting capabilities, separately accounting for transformation investments, and reasonably summarizing related expenses to provide clear financial records when applying for tax incentives.

For more about this Special Equipment Tax Incentive for Green and Digital Development, please read our China Briefing article here.

Extension of preferential IIT policy for dividends from NEEQ-listed companies

The MOF and the STA jointly issued the Announcement on Continuing the Implementation of the Differentiated Individual Income Tax (IIT) Policy on Dividends for Companies Listed on the National Equities Exchange and Quotations System (NEEQ).

This policy aims to promote the stable and healthy development of the capital market and support the growth of small and medium-sized enterprises (SMEs). Initially proposed in 2014, the policy was extended from July 2019 to June 30, 2024, and is now planned to be extended for another three years. This announcement is effective from July 1, 2024, to December 31, 2027.

Insights from Dezan Shira & Associates:

When individuals transfer shares, the holding period is calculated on a first-in, first-out basis to determine the taxable income. Dividend income obtained by securities investment funds from NEEQ-listed companies is also subject to IIT according to this announcement.

The announcement also provides detailed regulations on the definition of individuals holding shares of NEEQ-listed companies and the circumstances of transferring shares to ensure accurate implementation of the policy.

Relevant enterprises or individuals are suggested to:

• Understand policy details: Enterprises and individuals should thoroughly read policy announcements to understand the relationship between holding periods and dividend income taxation, as well as the specific tax calculation methods and declaration processes.
• Plan holding periods wisely: According to policy regulations, investors who hold shares for more than one year can enjoy a temporary exemption from personal income tax. Therefore, investors should plan their holding periods wisely to maximize tax benefits.
• Pay attention to the record date: When listed companies distribute dividends, they do not withhold IIT for shares held for one year or less (including one year) that have not yet been transferred as of the record date. Investors should pay attention to the record date to understand their holding status and tax obligations.
• Ensure sufficient funds: When transferring stocks, securities companies and other custodians will deduct taxes from personal fund accounts. Therefore, investors should ensure there are sufficient funds in their accounts to cover the tax deductions.
• Fulfill tax obligations promptly: After transferring stocks, individual investors should monitor their tax situation to ensure timely and full payment of personal income tax. Securities companies and other custodians should also deduct taxes according to the law and promptly notify investors to replenish funds if necessary.

Guidelines for tax incentives on corporate M&As released

In China, the trend of corporate mergers and acquisitions (M&A) is becoming increasingly prominent. This trend not only involves a growing number of regions and ownership types but also sees a continuous increase in the number and value of transactions. However, the diversity and complexity of M&A, along with the multiple interests involved, make the transfer of assets and equity, particularly intricate and complex in terms of tax treatment.

On July 24, 2024, the MOF and the STA, among other departments, released the Guidelines for Major Tax Incentives on Corporate Mergers and Acquisitions. These guidelines review the current effective tax incentive policies and tax administration documents that support corporate M&A.

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They categorize the policies according to the types of M&A, clearly defining the applicable entities, applicable situations, policy content, implementation requirements, and policy basis. Additionally, the guidelines include a compilation of specific tax policy documents and tax administration documents, aiming to provide taxpayers with a straightforward and practical operational guide to better understand and utilize tax incentive policies.

The guidelines cover multiple tax types, including CIT, value-added tax (VAT), deed tax, land value-added tax, and stamp tax. They detail tax incentive policies for various M&A scenarios such as changes in legal form, debt restructuring, equity acquisition, asset acquisition, corporate mergers, corporate splits, cross-border restructuring, intra-group asset (equity) transfers, non-monetary asset investments, and the corporatization of state-owned enterprises.

Innovation in cross-regional tax services: STA launches remote virtual window service

On July 17, 2024, the official website of the STA released an article briefing the implementation of “remote virtual window services” in the past few months.

The remote virtual window services were launched following the State Council’s issuance of the Guiding Opinions on Further Optimizing Government Services to Improve Administrative Efficiency and Promote ‘Efficiently Handling One Matter’ in January 2024.

This service significantly enhances the convenience for taxpayers handling cross-regional tax matters. The remote virtual window service transitions physical window services from offline to online, allowing taxpayers to interact visually with tax officials in real-time through an online platform, resolving queries and handling issues promptly. This transition enables taxpayers to manage tax matters nationwide.

Data shows that since the pilot in the Beijing-Tianjin-Hebei region at the end of March and its full roll-out at the end of May, tax authorities nationwide have handled over 101,000 cross-regional tax transactions. In summary, the introduction of the remote virtual window service is undoubtedly good news for taxpayers, as it not only improves tax handling efficiency but also enhances the overall tax experience.

Deepening policy support to promote equipment upgrades and trade-in of consumer goods

On July 24, 2024, the National Development and Reform Commission (NDRC) and the MOF issued the Notice on Several Measures to Intensify Support for Large-Scale Equipment Upgrades and Trade-In of Consumer Goods.

By arranging ultra-long-term special treasury bonds, it aims to increase support for large-scale equipment upgrades and the trade-in of consumer goods. These measures include optimizing support methods for equipment upgrade projects, raising the standards for scrapping and renewal subsidies, supporting the trade-in of household appliances, and strengthening organization and fund management. The goal is to promote industrial upgrading, boost consumption, and achieve sustainable environmental development.

Amid this policy push, several local tax bureaus, such as Guangdong, have introduced operational guidelines for tax policies promoting large-scale equipment upgrades and the trade-in of consumer goods.

Other key updates in July

In addition to the above, other tax-relevant updates in July include:

• Extension of the tariff exclusions on US goods: On July 20, 2024, the Customs Tariff Commission of the State Council announced the extension of the exclusion period for tariffs on US goods until February 28, 2025. This extension is part of the 13th exclusion extension list, with the previous exclusion period ending on July 31, 2024. The extension covers 95 items.
• VAT additional deduction application for high-tech enterprises kickstarted in July: The Ministry of Industry and Information Technology (MIIT), the MOF, and the STA have jointly released a notice on the application of VAT additional deduction policy for advanced manufacturing enterprises. For those who want to be listed in the “2024 Advanced Manufacturing Enterprises Enjoying VAT Additional Deduction Policy”, they must be general taxpayers in the manufacturing sector and must qualify as high-tech enterprises within 2024. Meanwhile, more than 50 percent of their 2023 sales should come from manufacturing sales. Enterprises listed in the “2023 Advanced Manufacturing Enterprises Enjoying VAT Additional Deduction Policy” can apply from July 2024, while new applicants can apply from September 2024. The deadline for all applications is April 10, 2025.
• Reduction of “six taxes and two fees” for small and low-profit enterprises: Enterprises registered as general VAT taxpayers, upon completing the annual tax settlement for the previous year, can enjoy the “six taxes and two fees” reduction from July 1 of the settlement year to June 30 of the following year if they qualify as small and low-profit enterprises. This means the “six taxes and two fees” reduction will enter a new cycle in July.
• Tax preferential policies for the 9th Asian Winter Games: On July 24, 2024, to support the preparation for the 9th Asian Winter Games in Harbin in 2025, the MOF, the General Administration of Customs, and the STA jointly issued tax preferential policies. These policies include exemptions from VAT, land appreciation tax, and stamp duty on various incomes obtained by the organizing committee, as well as exemptions from customs duties, import VAT, and consumption tax on imported consumables and other special materials for the games. These tax preferential policies are effective from January 1, 2024.
• Opinions on strengthening business and financial coordination: The Ministry of Commerce, the People’s Bank of China, the National Financial Regulatory Administration, and the State Administration of Foreign Exchange jointly issued the “Opinions on Strengthening Business and Financial Coordination to Support High-Quality Development of Cross-Border Trade and Investment.” The opinions aim to enhance business and financial coordination to support the high-quality development of cross-border trade and investment. The document proposes 11 policy measures in five areas, including optimizing foreign trade financial services, strengthening financial service guarantees for foreign investment, improving investment and financing services, optimizing the payment and settlement environment, and controlling financial risks.

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