By Hengka (Henry) JI, Partner, Zhong Lun Law Firm, Beijing
To further support technological innovation, the development of micro and small enterprises, and related undertakings, China’s Ministry of Finance and its State Administration of Taxation, on March 15, jointly issued Announcement No. 6 of 2021 Concerning the Extension of Several Preferential Tax Policies.
New Announcement No. 6 extends many preferential tax policies available to businesses scattered throughout 25 different tax circulars. The extended preferential tax policies set out in Announcement No. 6 mainly apply to income tax, value-added tax, resource tax, and stamp duty.
Further, the following week, on March 24, an Executive Meeting of China’s State Council announced that beginning January 1, 2021, China’s research and development “super deduction” will be enhanced significantly for manufacturing enterprises. According to China’s State Council, the changes will amount to China’s largest tax cut this year.
Multinationals with China operations should consider both developments for tax planning, management, and tax reporting.
Fixed asset investments
Announcement No. 6 extends tax benefits available to an enterprise that newly purchases fixed assets, except for real estate assets in land and buildings, after January 1, 2018.
Such purchases may be deducted when calculating the Chinese enterprise income tax on an accelerated lump-sum basis, provided that the value of a single fixed asset does not exceed RMB 5 million (approx. USD 761,000). The original circular was set to expire on December 31, 2020; the government, through Announcement No. 6, has provided a three-year extension to December 31, 2023.
R&D activities, super deduction for manufacturing
The so-called “super deduction” for research and development expenses is also extended for three years to December 31, 2023. This rule provides taxpayers with an extra 75% deduction for R&D expenses incurred when calculating the Chinese enterprise income tax, in addition to a deduction for the actual expenses incurred.
The super deduction applies provided that the expenses are not converted into intangible assets and included in current profits and losses. If the expenses have been converted into an intangible asset, such expenses may be amortized at the rate of 175% of the costs of the intangible assets before tax payment during the period.
An Executive Meeting of China’s State Council decided that, beginning January 1, 2021, the R&D super deduction will be increased for manufacturing enterprises from 75% to 100%.
Under this new rule, for example, for every one million a manufacturing enterprise spends for R&D activities, it will receive a two million deduction when calculating its Chinese enterprise income tax.
This policy is exciting news for multinational companies in the manufacturing sector, which are estimated to save about USD 12.3 billion in taxes in 2021.
This policy is exciting news for multinational companies in the manufacturing sector, which are estimated to save about USD 12.3 billion in taxes in 2021.
According to Announcement No. 6, value-added tax will continue to be refunded in full amount for both domestic-funded and foreign-funded research and development institutions that purchase China domestic equipment from January 1, 2019, through December 31, 2023. The announcement extended by three years the original expiration date for this measure, which was December 31, 2020.
Enterprise financing
According to the announcement, several preferential tax policies benefiting enterprise financing are extended through December 31, 2023.
First, a rule is extended that allows interest-free loans among a group’s entities (including the enterprise group entity itself) to be exempt from VAT.
In addition, interest income obtained by financial institutions from granting petty loans, a loan with the credit line of RMB 10 million (around USD 1.52 million) or less, to small enterprises, micro-enterprises, and individual industrial and commercial households is exempt from VAT.
Further, loan contracts concluded between financial institutions and small and micro enterprises shall continue to be exempt from stamp tax.
Policies for the deduction of reserves of insurance companies, financing (credit) guarantee institutions for small and medium-sized enterprises, securities companies, futures companies, banks, finance companies, urban and rural credit cooperatives, financial leasing companies, and other financial enterprises in calculating Chinese enterprise income tax shall continue to be effective after their original December 31, 2020, expiration date.
Energy Sector
Beginning on the date of the opening of the crude oil futures market to foreign investors through December 23, 2023, foreign individual investors’ investment income derived from China’s domestic crude oil futures shall be exempt from individual income tax . This temporary measure aims to support the opening of crude oil and other commodity futures markets.
According to Announcement No. 6, the resource tax on shale gas (based on the specified tax rate of 6%) shall be reduced by 30% from April 1, 2018, to December 31, 2023, an almost three-year extension compared to the original tax policy which sets the expiration date as March 31, 2021. The government’s aim is to promote the development and utilization of shale gas and effectively increasing the supply of natural gas.
Animation, aircraft, elder care, medical
Announcement No. 6 also extends some preferential tax policies through December 31, 2023, applicable to special industries such as the animation industry, aircraft industry, elderly care institutions, and medical institutions.
In addition, relevant preferential tax policies for the relocation of poverty-stricken populations for poverty alleviation and Taiwan residents working in the Pingtan comprehensive experimental area have been extended to December 31, 2025.
Last but not least, if certain taxes (which can be reduced or exempted pursuant to the preferential tax policies) have been paid prior to the promulgation date of Announcement No. 6, then such taxes paid can be deducted for the future tax payable or be refunded accordingly.
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Hengka (Henry) JI is a Partner at Zhong Lun Law Firm, Beijing.
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