In the past few months, China’s Ministry of Finance (MOF), State Administration of Taxation (SAT), and other governmental agencies released various new “Circulars” to the current Chinese corporate tax law. Most of these tax reduction measures took effect January 1, 2018 in order to support entrepreneurship, innovation, and the development of both high technology enterprises and small and mid-sized entities (SMEs). These tax reduction measures are good incentives for any foreign individuals/entities looking to invest in China or further expand their current operations. These will be lucrative changes to the Chinese tax landscape.
Circular 76 – Additional five years to loss carryforward period
On July 11, 2018, China’s MOF and the SAT jointly released Caishui [2018] No. 76 (Circular 76) which extends the current five-year loss carryforward period to five more years for a maximum of 10 years. Circular 76 only applies to High-and-New Technology Enterprises (HNTEs) and Technology-based Small and Medium-sized Enterprises (TSMEs) incurring tax losses in the last five years. For instance, a HNTE/TSME which incurred a tax loss in 2013, and has not fully utilized this loss in 2018, can now carry the tax loss forward to the next five years starting from January 1, 2018.
In particular, Circular 76 is important because it benefits foreign enterprises investing heavily in new technological developments. These enterprises usually incur large losses in the first years of operations and take more than five years to turn a profit. Enterprises and investors previously unable to take advantage of the entire carryforward loss may now utilize more of these large tax losses to offset future profits.
(Note that the SAT still needs to further clarify whether the change of HNTE status for the enterprises affects the utilization of tax losses in the years after the change/cessation of HNTE status.)
Circular 99 – Expand R&D super deduction to all enterprises
On September 20, 2018, the MOF, the SAT, and Ministry of Science and Technology jointly released Caishui [2018] No. 99 (Circular 99), which expanded the 175% research and development (R&D) super deduction rate to all enterprises.
Prior to the enaction of Circular 99, only TSMEs in China were allowed to claim a 175% super deduction on eligible R&D expenses. The R&D super deduction claim was still limited to 150% for all other Chinese enterprises. Now with the issuance of Circular 99, all Chinese enterprises are able to invest more in R&D activities to take advantage of the 175% super deduction. Multinational companies should review the scope of qualified R&D expenses, so as to maximize the tax benefits during this period.
Note that Circular 99 became retroactively effective on January 1, 2018 and only applies to R&D activities for the period from January 1, 2018 to December 31, 2020.)
Circular 54 – Increase the one-time deductible amount of newly-acquired equipment
On May 7, 2018, the MOF and SAT jointly released Caishui [2018] No. 54 (Circular 54). Circular 54 allows a one-time deduction in the year of acquisition, from January 1, 2018 to December 31, 2020, for any newly acquired device or equipment (except for real estate or constructions) valued at less than RMB5 million (approximately 750,000 USD). Circular 54 increases the previous limit of 1 million in Caishuifa [2014] No.75 (Circular 75) to RMB5 million. This 500% increase aims to incentivize all Chinese enterprises looking to maximize their deductions and decrease their tax bill.
(Note that if any newly acquired device or equipment exceeds RMB5 million, the taxpayers should still refer to Circular 75 and Caishui [2015] No. 106 (Circular 106) to claim the application of accelerated depreciation method.)
Circular 77 – Expand the scope of SMEs eligible for preferential CIT treatment
On July 11 2018, the MOF and SAT jointly released Caishui [2018] No. 77 (Circular 77) to further expand the scope of qualified small and medium-sized enterprises eligible for preferential Corporate Income Tax (CIT) treatments. Circular 77 increases the annual taxable income threshold of qualified SMEs from RMB500,000 to RMB1,000,000.
Qualified SMEs are companies not engaged in any restricted or prohibited industries and should meet the following criteria:
- Industrial companies have staff 100 or less, total assets and annual taxable income not greater than RMB30 million and RMB1 million, respectively
OR
- Companies other than industrial enterprises have staff 80 or less, total assets and annual taxable income not greater than RMB10 million and RMB1 million, respectively
According to Circular 77, from January 1, 2018 to December 31, 2020, qualified SMEs deriving annual taxable income of RMB 1,000,000 or less are eligible for both the 50% reduction of taxable income and the reduced CIT rate of 20%.
(As a note, further to Circular 77, the SAT released SAT PN [2018] No. 40 (PN 40) on 13 July 2018 to specify the issues from implementation perspectives. Qualified SMEs can refer to this source for implementation details.)
Conclusion
Circular 76, 99, 54, and 77 come as good news to any foreign individual/entity looking to invest in China. While this is by no means all of the tax incentives issued recently, it does provide a good summary of the most advantages tax-reduction measures. For questions regarding how you or your business may be impacted by, or can benefit from, these tax-reduction measures, contact Clayton & McKervey.
