In Q3 2023, the State Taxation Administration (“STA”) of China together with relevant authorities announced several new preferential tax policies and granted further grace period for certain existing ones, in a move to revive the economic growth and boost market confidence in China.
I. Extended preferential tax policies
From the Individual Income Tax (“IIT”) perspective, the following preferential policies regarding tax-exempt fringe benefits for expatriates, annual bonuses and stock options are extended until the end of 2027. See our earlier article for more information — Tax Alert: China’s IIT Preferential Policy for Expatriates Extended.
| # | Tax circulars* | Issued date | Tax category | Preferential tax treatment |
|---|---|---|---|---|
| 1 | Bulletin [2023] No. 29 issued by STA & MOF | 18 August 2023 | IIT | Tax exemption for eight categories of fringe benefits applicable to expatriates |
| 2 | Bulletin [2023] No. 25 issued by STA & MOF | 18 August 2023 | IIT | Preferential IIT treatment applicable to stock options of listed companies obtained by resident taxpayers** |
| 3 | Bulletin [2023] No. 30 issued by STA & MOF | 18 August 2023 | IIT | Preferential IIT treatment applicable to annual bonus received by resident taxpayers** |
**Including expatriates who stay in China for no less than 183 days with a tax year
In terms of Corporate Income Tax (“CIT”), Value-added Tax (“VAT”) and local surcharges, the following tax incentives are also extended until the end of 2027.
| # | Tax circulars* | Issued date | Tax category | Preferential tax treatment |
|---|---|---|---|---|
| 1 | Bulletin [2023] No.12 issued by STA & MOF | 2 August 2023 | CIT | Preferential CIT rate of 5% effectively (i.e. 20% CIT rate on 25% taxable income) for Small-scale & Low-profit Enterprises** |
| 2 | see above | see above | Local surcharges | 50% exemption of local surcharges, incl. Resource Tax, Urban Maintenance & Construction Tax, Education Surcharges & Local Education Surcharges, Property Tax, Stamp Duty (excl. Security Stamp Duty), Urban Land Use Tax and Arable Land Use Tax, applicable to Small-Scale & Low-profit Enterprises for CIT purposes or Small-scale taxpayers for VAT purposes |
| 3 | Bulletin[2023] No. 19 issued by STA & MOF | 1 August 2023 | VAT | VAT exemption for Small-scale Taxpayers*** with monthly revenue less than or equal to RMB 100,000, and preferential VAT rate of 1% (reduced from 3%) for other Small-scale Taxpayers |
| 4 | Bulletin [2023] No. 37 issued by STA & MOF | 18 August 2023 | CIT | One-off deduction of the cost of fixed assets not exceeding RMB 5 million per asset |
| 5 | Bulletin [2023] No. 38 issued by STA, MOF, NDRC & MEE | 24 August 2023 | CIT | 15% preferential CIT rate applicable to qualified service providers entrusted by pollutant processing enterprises or government authorities to provide operation & maintenance services for pollution prevention facilities |
| 6 | Bulletin[2023] No. 13 issued by STA and MOF | 2 August 2023 | SD | Exemption of Stamp Duty (“SD”) for loan agreement signed between financial institutions and Small-Scale & Low-profit Enterprises for CIT purposes** or Small-scale taxpayers for VAT purposes*** |
| 7 | Bulletin[2023] No. 41 issued by STA, MOF & MOC | 28 August 2023 | VAT | VAT refund for domestically-manufactured equipment purchased by qualified R&D institutions |
** Small-scale & Low-profit Enterprises for CIT purposes refer to taxpayers with annual taxable income of less than RMB 3 million, number of employees less than 300 and total asset of less than RMB 50 million.
***Small-scale Taxpayers for VAT purposes refer to the taxpayers with annual turnover for VAT purposes less than or equal to RMB 5 million.
II. Increased amount of certain IIT itemized deductions for resident individuals
Itemized deductions for personal living expenses for resident individuals were introduced in the 2019 IIT Reform to align with the international tax practice. Expatriates who stay in China for at least 183 days within a tax assessment year can choose to claim itemized deductions that are also applicable to Chinese residents, or the traditional tax exemption on eight categories of fringe benefits available to expatriates only. Once elected, the IIT treatment cannot be changed by the expatriate during the tax year.
In Q3 2023, several itemized deductions (also referred to as “special additional deductions”) for IIT purposes are further increased per Guo Fa [2023] No. 13 as follows:
| # | Item | Deductible amount |
|---|---|---|
| 1 | Nursing expenses for Children under three years old | RMB 2,000/month for each child |
| 2 | Children’s education expenses | RMB 2,000/month for each child |
| 3 | Continuing education expenses (for diploma education or certain professional qualifications) | RMB 400/month, up to 48 months for diploma education; and one-off deduction of RMB 3,600 in the year upon the issuance of relevant certificates for professional qualifications |
| 4 | Healthcare costs for serious illness | based on actual cost up to RMB 80,000 |
| 5 | House mortgage interest | RMB 1,000/month up to 240 months |
| 6 | Expenses for supporting the elderly over 60 years old | RMB 3,000/month (allowed to be shared among siblings with some limitations) |
| 7 | Housing rent | RMB 1,500/1,100/800 per month |
Expatriates working in China can compare the above itemized deductions with the tax exemption of fringe benefits specifically applicable to expatriates, make their choice at the beginning of the year and notify the employer accordingly. It is said that the latter policy for expatriates will be gradually replaced by the former itemized deductions and the transition period has recently been extended to the end of 2027 as stated in Section I.
Based on our observation, the tax exemption of fringe benefits applicable to expatriates only still appears to be more favorable in most cases, provided it is well planned and supported by proper documents, e.g. invoices (fapiao). Our professional team composed of HR & Payroll experts can provide advisory or compliance services in this regard upon your request.
III. Nationwide transition from paper-based invoicing system to E-invoicing system
As the STA pushes ahead with the Taxation Digitalization, the fully digitalized e-invoicing system was initially piloted in several cities in September 2020 and has been fully rolled out nationwide this year.
Under the new digitalized e-invoicing system, taxpayers can issue, submit and verify fully digitalized e-fapiao with QR codes online via the unified e-invoicing service platform. There is no need for cumbersome tax invoice control devices. Prior to the transition, taxpayers are required to revoke all existing paper or electronic blank invoices.
Please note that the digitalized e-fapiao is required to be archived in XML format according to Cai Kuai Bian Han [2023] No. 18 issued by Ministry of Finance, for at least 10 years as required by the prevailing tax laws. Hence, the data management would play an essential role in the day-to-day tax management of enterprises in China going forward.
Meanwhile, the Golden Tax System (“GTS”) Phase IV is under construction and is expected to be implemented next year. We will keep you in tune for the further progress of Taxation Digitalization in China.
IV. Draft amendment of Company Law open for public opinion containing capital contribution requirement
On September 1, 2023, the National People’s Congress (“NPC”) issued Third Draft of the amendment to the Company Law of the People’s Republic of China (“Third Draft Amendment”) open for public comment. Compared to the earlier version, the main changes are as follows:
- Companies would be required to pay up the registered capital in full within 5 years of incorporation. (At present, investors can choose to subscribe the registered capital for 20, 30 or even 50 years, depending on the expected span of operation.) It is uncertain whether any transitional arrangements will be introduced.
- The founding shareholder would be jointly and severally liable for any significant underpayment of the capital contribution.
- The legal representative would have to be either a director or a manager of the company.
- Shareholders can engage external firms to exercise their right to inspect the company’s financial and legal documents.
- The convening and resolution making of shareholders’ meeting and board meeting may be carried out by means of online correspondence, unless otherwise provided under the Articles of Association (“AoA”).
We will continue to monitor the developments with respect to the amendment of the Company Law and will provide relevant updates in due course.
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For any questions about accounting, tax and regulatory matters in China, please do not hesitate to reach out to us.
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Eloise Yao
Director
