Since 1st January 2018 high-tech enterprises, technology-oriented small- or medium-sized enterprises (SME) and small low-profit enterprises are entitled to further tax reliefs. According to the Chinese ministry of finance, two major measures have been implemented since January this year.
First, a high-tech enterprise or a technology-oriented SME in the year it complies with the conditions may carry forward the losses incurred in preceding five years to the extent of the portion that has not been offset yet, for up to ten years in the future. This marks an increase of 5 years.
Second, during the period from January 1, 2018, to December 31, 2020, the previous CNY 500,000 upper limit of the annual taxable income of a small low-profit enterprise is doubled to CNY 1 million. In practice, this means that if the annual taxable income of a small low-profit enterprise is equal to or lower than CNY 1 million, its tax payable will be calculated based on 50% of the taxable income. In addition, the tax rate is reduced from 25% to 20%, resulting in an effective final income tax rate of only 10% of the taxable income. The following graph illustrates this matter more clearly.
Nevertheless, there are certain criteria which companies have to meet to be eligible for the benefits mentioned under the second point.
Enterprises engaged in the industry should not be restricted or prohibited by the State and meeting the conditions as below.
1. Enterprises engaged in the industry should not be restricted or prohibited by the state and meeting the conditions as below.
2. 2.1 Labour-oriented companies: Annual income tax shall not exceed 1 million RMB; assets of the company shall not exceed 30 million RMB; the company shall not employ more than 100 workers (the number of workers includes workers employed by the company as well as leased workers).
2.2 Other companies: Annual income tax shall not exceed 1 million RMB; assets of the company shall not exceed 10 million RMB; the company shall not employ more than 80 workers.
This financial reform further facilitates China’s agenda to strengthen its high-tech industry and to decrease China’s dependence on foreign technologies. To achieve this, China is not only focusing on large-scale tech-companies but also on smaller ones by easing the financial pressure and giving them further incentives to focus on gaining profits. ECOVIS Beijing understands what advantages and disadvantages these changes bring to enterprises operating in China. Our tax team is providing clients with tailored concepts keeping in mind reforms and policy changes.
Richard Hoffmann is a partner at ECOVIS Beijing China. He obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining ECOVIS. In addition to being a member of the board of ECOVIS International, he is Supervisor for the China business of a respected German company and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: firstname.lastname@example.org
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