To stimulate the Chinese economy, from January 1, 2014, the central government has started to take new steps to reduce the tax burden for small and medium-sized enterprises (SMEs) (inclusive of Wholly Foreign-Owned Enterprises, or WFOEs) with respect to the Enterprise Income Tax (EIT rate 25%).
Who could benefit from these tax incentives?
Nature of the company | Number of employees | Amount of total assets | |
Manufacturing | No more than 100 | No more than 30,000,000 RMB | No more than 100,000 RMB or 100,000 RMB to 300,000 RMB |
Trading or other businesses | No more than 80 | No more than 10,000,000 RMB | No more than 100,000 RMB or 100,000 RMB to 300,000 RMB |
*Note: Taxable profit is always different from accounting profit.
Criteria of the tax incentives for the qualified SMEs regarding the EIT
If your company is qualified for the above conditions and your taxable profit is no more than 100,000 RMB, the Taxable profit could be reduced by half and the EIT rate is changed to 20%, that means your actual EIT rate will be 10% rather than 25%.
At the same time, if your taxable profit is no more than 300,000 RMB but in excess of 100,000 RMB, the EIT rate is reduced to 20%.
Example of the calculation
Example 1: At the year end of 2014, your annual taxable profit is 100, 000 RMB , so the EIT=100,000 * 50% * 20% = 10, 000 RMB.
If there are no tax incentives, your tax burden of EIT is 25,000 RMB (saving 15,000 RMB), so saved 60% tax .
Meanwhile, if your annual taxable profit is 100,001 RMB, you will have to pay the EIT rate of 20% (there is no progressive rate for EIT), which is 20,000.2 RMB. (100,001 RMB * 20%)
Example 2: At the end of 2014, your annual taxable profit is over 100,000 RMB but no more than 300,000 RMB, the EIT= 300,000 * 20% = 60,000 RMB. If there are no tax incentives, your tax burden of EIT is 75,000 RMB (EIT 25%), so saved 20% tax.
If your annual taxable profit is 300,001 RMB, you have to pay the EIT by full rate of 25%, so the EIT = 300,001 RMB * 25% = 75,000.25 RMB (no tax savings).
Summary
In a word, if your company wants to benefit from the above tax incentives, you have to make sure that the taxable profit of the company is no more than 100,000 RMB (EIT 10%) or no more than 300,000 RMB (EIT 20%); see the following tables.
Taxable profit | EIT rate |
No more than 100,000 RMB | 10% |
Over 100,000 RMB and no more than 300,000 RMB | 20% |
Over 300,000 RMB | 25% |
Note : There is no progressive rate for the EIT in the above table.
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