To further relieve the burden on Small companies’ impact of the Corona-19 epidemic, China has introduced a series of tax relief policies to bolster Small business competitiveness. On April 7, 2021, the China State Taxation Administration (STA) released the latest Tax relief Policy by providing preferential Value Added Tax (VAT) and Corporate Income Tax (CIT) for Small businesses in China. This guide will help you understand what you need to know to accurately file VAT and CIT tax cuts in 2021.
What is a Small Business in China?
The Small business refers to the Small and low-profit enterprises which have less annual revenue as compared to Medium-sized companies, including private limited companies, WFOE, JV, partnerships, or sole proprietorships (个体工商户). The following are Tax relief requirements for the Small business:
- The annual taxable income does not exceed 3 million RMB;
- The number of total employees does not exceed 300 persons; and
- The total assets do not exceed 50 million RMB.
What is the Value Added Tax (VAT) Reduction in China?
Over the last decade, the China government slashed VAT rates across a range of industries. According to the latest policy, the VAT threshold for small-scale taxpayers has now been raised from RMB 100,000 to RMB 150,000, which means that the monthly sales raised from RMB 100,000 to RMB 150,000 (or RMB 450,000 quarterly).
Thereby, instead of 100,000 RMB, the VAT exemption threshold for the Small Companies’ monthly turnover is up to and including 150,000 RMB, the VAT will be exempted from April 01, 2021, to December 31, 2022.
Moreover, if the number of quarterly sales is more than 450,000 RMB, the reduced VAT rate of 1% will continue to apply from January 1, 2021, to December 31, 2021, instead of the 3% previously. The Small business can generally choose to be taxed for a period of one month (150,000 RMB) or one quarter (up to and including 450,000 RMB). However, once chosen, the period cannot be changed within a tax year.
What is the Corporate Income Tax (CIT) Relief?
In accordance with the Corporate Income Tax Law of China, the basic tax rate of corporate income tax (CIT) in the current tax system is 25%, and the tax rate applicable to qualified Small companies is 20%; The tax rate for High-tech Enterprises authenticated by Government is 15%.
According to the Policy, from January 1, 2021, to December 31, 2022, for the portion of taxable income of Small and low-profit companies not exceeding RMB 1 million, the amount of taxable income can be halved from 25% to 12.5%, and the CIT will be levied at 20%. As a result, the effective CIT rate for the portion of taxable income not exceeding RMB 1 million will be reduced from 5% to only 2.5%.
How to calculate the Corporate Income Tax (CIT) relief for a Small business?
For example, if the taxable income of your company in the first quarter of 2021 is 500,000 RMB. You can enjoy the CIT relief policy when reporting the advance payment in the first quarter, and the actual CIT payable = 500,000 × 12.5% × 20% = 12,500 RMB, the reduced CIT Amount = 500,000 × 25% – 1.25 = 112,500 RMB.
If the accumulated taxable income of your company in the first and second quarters of 2021 is 1.5 million RMB. When applying for advance payment in the second quarter, you can continue to enjoy the CIT relief policy for small companies, and the actual CIT payable = 1,000,000 × 12.5% × 20%+ (1,500,000-1,000,000) × 50% × 20% = 25,000 + 5 = 75,000 RMB, the reduced income tax = 1,500,000 × 25% – 7.5 = 300,000 RMB.
Although the coronavirus had an impact on the revenue, employment of small companies, China government’s response to the pandemic continues to evolve the stimulus package. Furthermore, China also release more favorable policies for investors in Hign tech startups came including resources and land use. Are you a small business? Our Accounting professional team can help you claim the tax and fee cuts. It could help you avoid Tax mistakes in China.