On 17 January 2019, the Chinese Ministry of Finance and State Administration of Taxation jointly issued a circular Cai Shui (2019) No.13 that sets out the new preferential tax policy available to qualified SMEs for the period from 1 January 2019 to 31 December 2021. The salient points of the new policy are as follows:
Corporate Income Tax (CIT)
For qualified SMEs, the first RMB1 million of annual taxable income is eligible for 75% reduction when calculating CIT and the income between RMB1 million and RMB3 million is eligible for 50% reduction. The applicable CIT rate is 20%. That is, the effective tax rates for the first RMB1 million taxable income band and the second RMB1-to-3 million taxable income band are 5% and 10% respectively. The old policy provided a 10% effective tax rate for annual taxable income of RMB500,000 or less and the applicable CIT rate was also 20%.
Small-scale VAT taxpayers that derived monthly sales of RMB100,000 or below are exempt from VAT. The old policy provided a monthly VAT exemption threshold of RMB30,000 or below.
Provincial (autonomous regions and municipalities) governments may reduce the local taxes such as Resource tax, Urban Maintenance and Construction Tax, Stamp Duty, Urban Land Use Tax, and Farmland Occupation Tax as well as Education Surcharges and local Education Surcharges on small-scale VAT taxpayers by up to 50%.
"Qualified SMEs" should not engage in any restricted or prohibited industries in mainland China and should have annual taxable income not exceeding RMB3 million, headcount not exceeding 300 and total assets not exceeding RMB50 million.
Tax saving under the new policy
Assuming a qualified SME derived an annual taxable income of RMB0.6 million with annual sales of RMB1.2 million (i.e. monthly sales of RMB100,000), the tax saving is as follows:
|Total CIT and VAT
(500,000 x 10% + 100,000 x 20%)
(100,000 x 3% x 12)
(600,000 x 5%)
Note: The SME is a small-scale VAT taxpayer and subject to 3% VAT rate
Contributed by: Masson de Morfontaine, Anthony Hung