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

Encompassing everything from international scandals to seismic political events, it’s a privilege to cover the intriguing world of tax
In his newly created role, current SSA commissioner Bisignano will oversee all day-to-day IRS operations; in other news, Ryan has made its second acquisition in two weeks
In the age of borderless commerce, money flows faster than regulation. While digital platforms cross oceans in milliseconds, tax authorities often lag. Indonesia has decided it can wait no longer
The tariffs are disrupting global supply chains and creating a lot of uncertainty, tax expert Miguel Medeiros told ITR’s European Transfer Pricing Forum
Corporate counsel should combine deep technical knowledge with strategic dynamism, says Agarwal, winner of ITR’s EMEA In-house Indirect Tax Leader of the Year award
Luxembourg’s reform agenda continues at pace in 2025, with targeted measures for start-ups and alternative investment funds
Veteran Elizabeth Arrendale will lead the new advisory practice, which will support clients with M&A tax structuring, post-deal integration, and more
MAP cases keep increasing, and cases closed aren’t keeping pace with the number started, the OECD’s Sriram Govind also told an ITR summit
Nobody likes paperwork or paying money, but the assertion that legal accreditation doesn’t offer value to firms and clients alike is false
Ryan hopes the buyout will help it expand into Asia and the Middle East; in other news, three German finance ministers have called for a suspension of pillar two
Gift this article