Q1 Tax Policy Focus

During the first quarter of 2023, the Chinese tax authorities introduced several tax incentive policies in terms of corporate income tax, individual income tax, and VAT. Some of these policies are the extension or changes to existing policies, while others are newly introduced. In this newsletter, we aim to provide a summary of the tax policies released in China during Q1 2023.

Topic 1: Extension of Preferential Individual Income Tax Policy

On January 16^th, 2023, the Ministry of Finance and the State Administration of Taxation jointly released “MOF and STA Announcement [2023] No. 2”), which extended the individual income tax (“IIT”) preferential policy for one year. This policy pertains to the share options granted by listed companies. Until December 31^st, 2023, the equity incentive income received by employees will not be combined with their annual employment income and will be taxed separately by adopting the annual IIT rates applicable for the comprehensive income. This extension of the preferential IIT treatment will significantly lower the IIT burden on individuals.

The changes in policy regarding the preferential tax treatment for equity income are shown as follows:

It should be noted that the preferential policy has only been extended on a yearly basis. It remains uncertain whether the policy will be extended further beyond 2023.  

Topic 2: Changes in VAT Incentive Policy for Small-Scale VAT Payers

Small-scale VAT payers are typically subject to a VAT levy rate of 3%. However, in 2022, they became eligible for a VAT exemption policy. From January 1^st, 2023, to December 31^st ,2023, the VAT incentive policy will continue, but the VAT levy rate will be increased to 1%.

In addition, the VAT exemption threshold for small-scale VAT payers has been decreased. Starting January 1^st, 2023, small-scale VAT payers with monthly sales of up to CNY 100K will be exempt from VAT.

Please refer to the following table for a summary of the changes in the VAT policy:

Topic 3: Changes to Super-Credit Rates for Input VAT credit

From April 1^st, 2019, until December 31^st, 2022, qualifying general VAT payers were granted a 10% of “super credit” of input VAT, which could be used to offset their output VAT. This means that qualifying VAT payers received an additional 10% credit in addition to their creditable input VAT supported by valid tax invoices. Qualifying general VAT payers include taxpayers providing postal services, telecommunications services, modern services, and lifestyle services. From October 2019 to December 2022, the super-credit rate for taxpayers providing lifestyle services increased to 15%.

In 2023, the super credit policy will remain in effect, but the rates of super credit have decreased. According to MOF and STA Announcement [2023] No. 1, from January 1^st, 2023, to December 31^st, 2023, the super-credit rate for taxpayers providing postal services, telecommunications services, and modern services has decreased from 10% to 5%. Additionally, the super-credit rate for taxpayers providing lifestyle services decreased from 15% to 10%.

The changes in the policy are summarized in the following table:

Topic 4: Tax Incentive Policy for Small-Scale and Low-Profits Enterprises Continues in 2023 and 2024

To support the development of small-scale and low-profit enterprises, the Ministry of Finance and the State Taxation Administration released Announcement [2023] No. 6 on March 26^th, 2023, outlining the tax incentive policy for taxable income no higher than CNY 1 million.

Effective from January 1^st, 2023, to December 31^st, 2024, small-scale and low-profit enterprises with an annual taxable income not exceeding CNY 1 million can enjoy a preferential CIT rate of 20%. Their taxable income will be computed at 25% of the taxable profit, resulting in an effective tax rate of 5%.

Furthermore, Announcement [2022] No. 13 of the Ministry of Finance and the State Taxation Administration extends the same tax incentive policy until the end of 2024 for taxable income between CNY 1 million and CNY 3 million.

The tax incentive policies for 2023 and 2024 are summarized as follows:

From 2023 to 2024, small-scale and low-profit enterprises that meet the qualifications will be subject to an effective tax rate of 5% for taxable profits no higher than CNY 3 million.

The provisional CIT return for the first quarter of 2023 has already begun. We advise small-scale and low profits enterprises in China to review their financial status and assess their eligibility for these tax benefits.

Topic 5: R&D Super Deduction Ratio of 100% Applies to All Qualified Enterprises

On March 26^th, 2023, the Ministry of Finance and the State Taxation Administration jointly released Announcement [2023] No. 7 to encourage R&D activities and promote technology innovation by introducing a new preferential policy on R&D super deduction.

According to the Announcement [2023] No. 7, from January 1^st, 2023, enterprises that have incurred R&D expenses that have not formed intangible assets are eligible for an additional 100% deduction of the R&D expenses. If the R&D expenses have resulted in intangible assets, 200% of the costs of the intangible assets can be amortized.

Before 2023, the R&D super deduction ratio was typically 50% or 75%. In 2021 and 2022, the 100% R&D super deduction ratio was only applicable to manufacturing enterprises and Small and Medium-sized Tech Enterprises. Starting from January 1^st, 2023, the 100% R&D super deduction ratio applies to all qualified enterprises.

The preferential policies on R&D super deduction are outlined as follows:

The R&D super deduction can significantly reduce the CIT burden for eligible enterprises. It is important to note that not all enterprises qualify for this deduction, and not all types of R&D expenses are eligible for it in China.

Therefore, we advise qualified enterprises to carefully review their R&D expenses and ensure that they have sufficient documentation to support their deduction claims.

Topic 6: A New Round of IIT Reform is Underway

In March 2023, during the two sessions of the National People’s Congress (“NPC”) and Chinese People’s Political Consultative Conference (“CPPCC”), the Financial and Economic Committee of the 14th NPC submitted a proposal to improve the IIT regulations in order to achieve common prosperity. The proposal recommends expanding the scope of the IIT comprehensive income and improving the items and standards for special additional deductions, suggesting that a new round of IIT reform is forthcoming in China.

In 2019, China implemented a full round of IIT reform, which included combining four types of income into the comprehensive income and subjecting it to an annual IIT rate of 3% – 45%. However, a flat rate of 20% applies to income such as interests, dividends, income from property leasing, income from property transfer, and contingent income. In addition, business operation income is subject to an annual IIT rate of 3% – 35%. It is anticipated that more categories of income will be combined into the compressive income during the round of IIT reform, leading to different tax burdens. 

Currently, the special additional deductions include expenses for children’s education, continuing education, serious illness medical treatment, housing loan interest, housing rent, caring for the elderly, and caring for infants under the age of 3. Qualified individuals can enjoy deductions of several hundred or several thousand RMB per month to reduce their IIT burden. The items and standards for the special additional deductions may be adjusted according to China’s economic and social development.