China’s New Tax Incentives for Small Businesses
The Chinese market is full of opportunity for large and small companies alike. Perhaps it is seldom realized that China increasingly welcomes foreign companies of all sizes, not only large ones but also smaller ones. Even during the trade disputes with the U.S., as of January 1st of 2019, China has recently added more tax incentives to promote small business in China. These rules will be in place for three years. As a foreign company, you can take advantage of the new regulations that have come into place to make your market into China even easier.
- Understanding Tax Requirements for Small Businesses
- The New Tax Cuts
- How FDI China can Help Your Company
Understanding Tax Requirements for Small Businesses
First, here’s an introduction to China’s general taxation laws, which are set up to incentivize certain industries and focus areas. One such area is a small-scale enterprise. If a company meets any of the points below, it will be considered as a small-scale business:
- Less than 300 employees or;
- Annual sales of less than RMB 30 million or;
- Assets of less than RMB 40 million, it is in this category.
Here are the general rules:
The Chinese economy functions under a value-added tax (VAT) system, which means that the seller pays tax on the items sold. Even as a small business, you are responsible for paying this tax, so an understanding of the rules is valuable.
The VAT tax applies to all sales of goods, except for real estate properties, labor services relating to the processing of goods, replacement and repairment services done within China. The standard VAT rate is 17%, although certain necessities are taxed at 13%.
There is an additional consumption VAT tax on 14 special categories of consumable goods. They are tobacco, cosmetics, alcoholic drinks, jewelry, gasoline, fireworks, motorcycles, automobiles, diesel oil, tires, golf equipment, luxury watches, yachts, wooden floorboard, and disposable chopsticks. Sales volume and/or sales price determines the tax owed.
A further tax liability to consider is a tax on services provided. This can range from 3% to 20% and covers the transfer of intangible properties and the sale of real estate.
If you’d like local guidance and more information on the tax laws, click here!
Now, onto the new changes to the regulations centered around small businesses.
The New Tax Cuts
On January 9th of 2019, China’s State Council announced RMB 200 billion (USD 29.43 billion) worth of tax cuts on small companies, affecting an estimated 95% of corporate taxpayers. Of those 95% affected, their tax burden will be from 5% to 10% less than before. Some highlights from the new rules are:
For companies with income of less than RMB 1 million (USD 149,090) per year: they can now enjoy a corporate income tax (CIT) rate of 20% on a quarter of their total income, with the other three quarters of it being tax-free. Previously, half of their income was taxed at 20%.
Companies with income from RMB 1 million to 3 million (USD 149,090 to 447,280): can receive that same preferential 20% rate on half their income, with the other half being tax-free.
There are several new VAT rules as well, centered around small-scale VAT payers. Small-scale taxpayers are exempt from paying VAT on many items.
With the new rules, small-scale level VAT taxpayers are defined as those with monthly sales under RMB 100,000 (USD 14,715) per month, up from the previous RMB 30,000 (USD 4,415). Businesses with quarterly sales of under RMB 300,000 (USD44,145) also are under the new VAT exemption. Furthermore, businesses that have had less than RMB 5 million (USD734,500) in sales over the last four quarters or 12 months can choose to transfer into the new, small business VAT requirements by December 31, 2019.
Regional governments will also now have permission to cut the VAT tax on local taxpayers by up to 50%. The tax brackets for venture capital funders will also be expanded.
All of these new tax incentives are part of a broader push by the government to boost the economy, even as there are concerns about its slowing pace. Many observers believe that tax incentives will be the primary strategy to strengthen it, instead of a wider stimulus. Regardless, they are good news for smaller-sized companies interested in market entry in China.
How FDI China can help your Company
The new tax incentives for small businesses are good news for many foreign companies. As the Chinese market grows, there are more and more opportunities for smaller-sized companies to start business operations in China and expand. This article gives an overview of the new tax regulations. However, there is much more to the system, which varies from western ones in many ways. To ensure that your company is in accordance with the Chinese system, reach out to FDI China. Founded in 2005, we are a private Chinese company that can serve all your market entry and tax accounting needs. Our multi-lingual team has many years of experience navigating the constantly-changing Chinese tax law environment, and are excited to work with you.