An annual tax reduction of 200 billion yuan is expected for small-profit businesses as part of the latest tax relief policies set forth for small and micro business. The tax relief was announced during the 12 January State Council meeting chaired by Premier Li Keqiang. Following suit, the Notice on Implementing the Policy of Inclusive Tax Relief for Small and Micro Enterprises Circular, Caishui No. 13 [2019] (Circular 13), jointly released by the Ministry of Finance and the State Administration of Tax on 17 January widens the eligibility for more enterprises to benefit from corporate income tax reductions.

Under the Enterprise Income Tax Law, the general corporate income tax rate is 25%, although small profit enterprises are subject to a lower CIT rate of 10%. Since 2015, the annual taxable income threshold for small and micro-businesses has been expanded to allow more businesses to qualify as small and micro businesses, and on a macro level, reduce corporate burden, increase job creation and support economic growth.

Qualifying conditions

In the recent Circular 13, the qualifying threshold of annual taxable income has been expanded to RMB 3 million from the previous qualifying threshold of RMB1 million. In practise, enterprises are classified as small and micro-enterprise, and benefit from preferential CIT rates under the following conditions:

• An enterprise is not engaged in restricted or prohibited industries (according to the 2019 National Negative List, see our previous Negative List post);
• Annual taxable income does not exceed RMB3 million;
• Number of employees (including workers dispatched to enterprises) does not exceed 300; and
• The total amount of assets does not exceed RMB 50 million

Corporate income tax rates

Progressive preferential tax rates for small profit enterprises include:

Less than RMB1 million annual taxable income
Enterprises with RMB 1 million or lower annual taxable income are subject to 20% CIT on 25% of their annual income. The other 75% of the annual taxable income is tax exempted. Overall, the effective CIT rate is 5%

RMB 1-3 million annual taxable income
Enterprises with RMB 3 million or lower annual taxable income are subject to 20% CIT on 50% of their annual income. The other 50% of the annual taxable income is tax exempted. Overall, the effective CIT rate is 10%

Calculations

In accordance with the Issues concerning the Implementation of the Policy on Inclusive Income Tax Reliefs for Small Profit Entreprises, tax reductions can be claimed by filing tax returns on a quarterly basis. Determining indicators for qualified small and micro enterprises, such as annual taxable income, company assets and the number of employees, are temporarily determined at the end of each declaration period of the current year in the following manner:

• The number of an enterprise’s employees and its total assets are calculated separately as a quarterly average number = (number at the beginning of a quarter + number at the end of the quarter) / 2.
  
  
• Annual taxable income is temporarily determined as not exceeding the standard RMB 3 million at the end of the declaration period.
  
  
• The enterprise’s employees do not exceed 300 persons and its total assets do not exceed RMB 50 million.

Companies who previously did not qualify as a small profit enterprise in the current year can benefit from the same preferential tax rates for small profit enterprises under one of the following conditions:
The company, in the middle of the current year, is determined to meet the aforementioned indicators of company assets, the number of employees and annual taxable income in the declaration period.

• The company, in the middle of the current year, is determined to meet the aforementioned indicators of company assets, the number of employees and annual taxable income in the declaration period.

• A company paying CIT on a monthly basis and during April, July and September of the current year, is determined to have met the aforementioned indicators of company assets, number of employees and annual taxable income in the declaration period. In such a case, the following tax prepayments will be adjusted to a quarterly basis and once adjusted cannot be changed during the current year.

A company paying CIT on a monthly basis and during April, July and September of the current year, is determined to have met the aforementioned indicators of company assets, number of employees and annual taxable income in the declaration period. In such a case, the following tax prepayments will be adjusted to a quarterly basis and once adjusted cannot be changed during the current year.

Example

At the beginning of 2019, Company A does not meet the conditions of being categorized as a small profit enterprise. However, in July 2019, the annual taxable income indicators are temporarily determined to be RMB2.5 million, the number of workers has decreased from 320 to 270 and the company assets remain at RMB50 million.

Therefore, since the annual taxable is temporarily determined to be lower than RMB 3 million and the number of workers does not surpass 300, Company A is subject to 20% CIT on the RMB 1,250,000 of the annual taxable income, whilst the other RMB 1,250,000 is tax exempted.

Although there are no further supporting materials to be submitted to claim preferential tax rates, companies should note monthly (quarterly) and annual tax return forms have been updated and should be completed according to the given instructions.

The preferential tax rates for small profit enterprises are effective from 1 January 2019 and implemented for a three-year period. Some 95% of corporations in China, and of which 98% are private-enterprises, are said to be affected by the changes. Therefore, it is extremely advisable for companies to seek professional advice to understand how they may benefit from preferential tax rates.

If you would like more information about the small-profit business or taxation in China or other related corporate matters, send us an email at talktous@horizons-advisory.com, and we’ll have a Horizons professional contact you.

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