China enhances tax relief for innovation and small businesses

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

China enhances tax relief for innovation and small businesses

Sponsored by

sponsored-firms-kpmg.png
shanghai-3459422 (1).jpg

Lewis Lu of KPMG China discusses enhanced tax measures to support innovation and small businesses.

Following the removal of COVID-related restrictions, China policymakers have returned to an emphasis on economic recovery and growth, setting a target GDP growth rate of 5% for 2023. Given that innovation and small businesses are key drivers for the Chinese economy, several measures have been set out to boost their development.

R&D super deduction rules enhanced

The existing corporate income tax (CIT) super deduction for R&D expenses provides for a baseline 175% deduction, in other words, a 75% bonus or super deduction. This applied at a higher 200% rate for certain manufacturing businesses and small and medium-sized high-tech enterprises. As a special temporary measure, the 200% rate had also been applied to other enterprises for the fourth quarter of 2022. Now the authorities have gone further and set this 200% rate as the standard rate, for most enterprises, on a permanent basis. This still excludes enterprises in tobacco manufacturing, accommodation and catering, wholesale and retail, real estate, leasing, and entertainment. This is contained in the Ministry of Finance (MOF) and the State Taxation Administration (STA) Circular No. 7), issued on March 26 2023, and effective from January 2023.

It should be noted that the existing super deduction limitation for payments made to overseas R&D contractors will remain unchanged. That is, only 80% of the sub-contracted R&D expenses are entitled to the R&D super deduction. This is coupled with a requirement that foreign outsourcing expenses must not exceed two-thirds of the eligible R&D expenses incurred domestically in China.

At the same time, the Chinese tax authorities have also been strengthening follow-up inspections on usage of the incentive. Businesses are recommended to enhance internal controls over the conduct of R&D activities and associated documentation.

Income tax reductions for small businesses and sole proprietors extended

Also on March 26 2023 the MOF and STA announced, in Circulars No. 5 and No. 6, an extension to the end of 2024 of income tax reductions for small enterprises and sole proprietors. These policies were due to expire on December 31 2022.

Small enterprises, with profits up to RMB 3 million ($430,000), will enjoy an effective CIT rate of 5% up to the end of 2024. This is arrived at by applying a CIT rate of 20% to a tax base calculated as 25% of profits. It might be noted that in 2021 and 2022 an even lower rate (2.5%) was applied to the first RMB 1 million of profits. While this has now lapsed, the 5% rate is still much lower than the standard rate of 25%.

Sole proprietors with taxable business income less than RMB 1 million can continue to enjoy a 50% reduction of individual income tax (IIT) rate until the end of 2024. This is on top of the existing incentives provided to them. As the extension was announced in March with retroactive effect from January 2023, overpaid tax can be recovered in two ways. This is either:

  • Through offsetting against future monthly IIT liabilities, with a refund of the remainder (if any) at the time of annual IIT filing; or

  • Through direct refund.

It should be noted that such incentives are coming hand in hand with greater tax scrutiny on certain sectors, such as entertainment and live streaming.

more across site & shared bottom lb ros

More from across our site

APAs should provide a pragmatic means to agree to an arm's-length outcome for an Australian entity and for the ATO, the tax authority said
Overall revenues and average profit per partner also increased in the UK, the ‘big four’ firm revealed
Increasingly complex reporting requirements contributed towards the firm’s growth in tax, it said
Sector-specific business taxes, private equity tax treatment reform and changes to the taxation of non-residents are all on the cards for the UK, authors from Herbert Smith Freehills Kramer predict
The UK’s Labour government has an unpopular prime minister, an unpopular chancellor and not a lot of good options as it prepares to deliver its autumn Budget
Awards
The firms picked up five major awards between them at a gala ceremony held at New York’s prestigious Metropolitan Club
The streaming company’s operating income was $400m below expectations following the dispute; in other news, the OECD has released updates for 25 TP country profiles
Software company Oracle has won the right to have its A$250m dispute with the ATO stayed, paving the way for a mutual agreement procedure
If the US doesn't participate in pillar two then global consensus on the project can’t be a reality, tax academic René Matteotti also suggests
If it gets pillar two right, India may be the ideal country that finds a balance between its global commitments and its national interests, Sameer Sharma argues
Gift this article