Major Tax Cuts for Smaller Companies in China
In order to support the country’s main job creators, China’s State Council chaired by Premier Li Keqiang on 9 January 2019 announced that the Chinese government will support the development of micro and small enterprises (MSEs) by introducing major tax cuts. The initiative will be implemented retrospectively from 1 January 2019 and will tentatively last for 3 years, until 31 December 2021.
At the same time financing will be made easier, by lowering the requirements for the bank reserve ratios.
In 2018 the Chinese government already made provisions for tax cuts for MSEs, valued at almost CNY 200 billion. In order to help innovation, entrepreneurs and job creation, even more tax cuts have now been rolled out – impacting both VAT and CIT.
An additional note: These tax cuts are really benefiting and rewarding companies that are compliant and paying their taxes, while making it more difficult to attempt to cheat the tax authorities.
VAT
In China, a company is registered either as a small-scale taxpayer or as a general taxpayer. It is possible to register as a small-scale taxpayer, and keep this status, if the revenue within the last 12 months does not exceed CNY 5 million (the previous threshold was CNY 5 million for service companies, but CNY 800,000 for trading companies). The benefit of being registered as a small-scale VAT taxpayer is that the company only needs to pay 3% VAT on sales (whereas companies with general VAT taxpayer-status generally pay 6% VAT on services, 10% on agricultural products and 16% on goods). Disadvantage is that small-scale tax payers cannot issue special fapiaos by themselves; if they have a client or customer that requires such, they will need to go to the tax bureau to have it issued.
Up until January 2019 companies with small-scale VAT taxpayer status were exempted from paying VAT if their quarterly revenue was below CNY 90,000. This threshold has now been raised to CNY 300,000. Companies that had the status of general taxpayer before January 2019 have until 31 December 2019 to transfer their status to small-scale VAT taxpayer, if they now qualify as such.
CIT
The standard rate for Corporate Income Tax (CIT) on profit in China is 25%. Previously both micro and small companies benefited from a preferential CIT rate; small companies paid 20% on their full annual profit, while micro companies paid 20% CIT on half of their annual profit (the effective CIT rate thereby previously being 10%). From January 2019 onwards, micro companies only have to pay the 20% CIT on 25% of their profit, where small companies now pay 20% on only half of their profits. Please see below overview:
| Company type | Definition | CIT-rate previous to 2019 | CIT-rate from January 2019 | Effective CIT-rate as of January 2019 |
|---|---|---|---|---|
| Micro | - Annual profit less than CNY 1 million - Less than 300 employees - Total value of assets less than CNY 50 million | 20% on 50% of annual profit | 20% on 25% of annual profit | 5% on total annual profit |
| Small | - Annual profit between CNY 1-3 million - Less than 300 employees - Total value of assets less than CNY 50 million | 20% on total annual profit | 20% on 50% of annual profit. | 10% on total annual profit |
| General | - Annual profit above CNY 3 million. | 25% on total annual profit | 25% on total annual profit | 25% on total annual profit |
Summary
For convenience, we summarize the new rules which could benefit smaller clients (including foreign-invested companies):
- The threshold for being able to register as a small-scale taxpayer is now CNY 5 million in revenue within the previous 12 months, for both service and trading companies.
- Small-scale tax payers are exempt from paying VAT if their revenue is below CNY 300,000 per quarter (up from CNY 90,000 per quarter).
- MSEs from January 2019 will enjoy even more preferential CIT rates.
Smaller businesses should actively consider whether the benefits of being a general tax payer – including convenience, and being able to deduct output VAT from input VAT to calculate the final VAT cost – still outweighs the benefits offered to them as small-scale taxpayers. This decision should not impact CIT rates though, which apply to all qualifying micro and small enterprises.