China corporate income tax is applicable to all enterprises (except sole proprietorships and partnerships) including all organizations that generate income in China. Recently, China’s State Administration of Taxation (SAT) clarified its preferential corporate income tax (CIT) policies for small and low-profit enterprises in an announcement released on July 13. The announcement explains the types of enterprises that qualify for preferential CIT policies and for what length of time.
Corporate Income Tax in China
The corporate income tax (CIT) is a tax on the income of the production and operation of the domestic enterprises and operating units. The scope of the taxpayer is larger than the income tax of the company. The enterprise income tax payers are all domestic funded enterprises or other organizations in People's Republic of China which perform independent economic accounting.
The CIT Law categorizes enterprises into resident enterprises and non-resident enterprises, which are subject to different tax obligations. A 25% standard CIT rate is applied to resident enterprises and non-resident enterprises with income-generating establishments in China. A 10% withholding rate (temporarily reduced from 20%) is applied to China-sourced income not related to a non-resident enterprise’s establishments in China, or China income derived by non-resident enterprises without establishments in China. Small and low-profit enterprises are entitled to a reduced CIT rate of 20%, and if a taxpayer qualifies as a high-tech enterprise, a reduced CIT rate of 15% applies.
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Preferential Policies for Small and Profit Enterprises
From January 1, 2018 to December 31, 2020, small and low-profit enterprises will be eligible for preferential CIT policies if their taxable income in the previous year amounted to no more than RMB 1 million.
If an enterprise’s taxable income in the previous year was greater than RMB 1 million, or if it is a newly-established enterprise that had no taxable income in the previous year, such enterprises can still qualify for preferential CIT policies, if taxable income for the current year is estimated to be RMB 1 million or less.
Eligible enterprises will only have to pay tax on half their taxable income, at a rate of 20%, as outlined in the Ministry of Finance and the SAT’s Circular on Further Expanding the Scope of Preferential Income Tax Policies for Small and Low-Profit Enterprises (Cai Shui [2018] No. 77).
In addition to preferential tax rates, eligible enterprises will also benefit from simplified tax filing procedures.
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