China: Tax Benefits in 2023

With the introduction of the draft VAT Law, its legislation in 2023 is on the horizon. Currently, most of the preferential policies regarding VAT are provided to certain taxpayers for a given period, targeted at supporting the development of specific industry sectors and the operations of small and low-profit enterprises.

The existing VAT policy is particularly favorable to small-scale VAT taxpayers, whose monthly sales below RMB 100,000 are exempted from VAT payments from 1 January 2023 to 31 December 2023. Meanwhile, a reduced rate of 1 percent will be levied on taxable income, which was formerly subject to a 3 percent rate. This regulation will benefit many small and low-profit enterprises in 2023.

From 1 January 2023 to 31 December 2023, enterprises in the service industry for production are allowed to deduct their VAT payable by an additional 5 percent of the input VAT for the current tax period, while enterprises in the service industry for daily life are allowed to deduct their VAT payable by an additional 10 percent of the input VAT for the current tax period.

With regard to the uncompensated lending of funds between related parties within an enterprise group, the VAT exemption for such transactions will continue to be effective until 31 December 2023. The extension of this preferential policy will have a positive impact on the optimal use of funds of the enterprise group in China; from a Corporate Income Tax perspective, in principle, no special tax adjustment will be made by the tax authority as long as the free lending of funds does not directly or indirectly lead to a decline in the overall tax revenue of the state.

In 2023, the preferential IIT treatment regarding the equity incentives obtained by taxpayers from listed companies continues to be implemented until 31 December 2023. In a word, such equity incentives income can still be separately considered for taxation and subject to the tax rates stipulated in the Tax Rate Table for Annual Comprehensive Income. The favorable separate taxation of the one-off annual bonus also continue to be effective until 31 December 2023.

For foreign expatriates who qualify as resident taxpayers, they may either choose to enjoy the special additional deductions, or continue to enjoy the tax exemption for foreign expatriates for certain allowances (including housing allowance, language training allowance and children's education allowance, etc.) due to the extension of the relevant regulations until 31 December 2023.

In order to promote the innovative activities of taxpayers, the preferential tax regulation for newly purchased equipment continues to apply for 2023. This regulation has been implemented since 2018, where the equipment and devices newly purchased by enterprises with a unit cost under CNY 5 million, such cost is allowed to be considered into the costs and expenditures in a lump-sum for the current period and deducted in full in the calculation of taxable income.

Nevertheless, it should be noted that several preferential CIT regulation will expire in 2023. For example, the regulation that eligible Small and Micro Enterprises (“SMEs”) may voluntarily choose to apply special deduction for taxable income for the newly purchased equipment and devices in 2022 based on a certain percentage of their unit cost, becomes invalid at the end of 2022. Meanwhile, another regulation that the new equipment and devices purchased by High New Technology Enterprises (“HNTE”) in the fourth quarter of 2022 are permitted to be deducted in a one-off manner as costs and expenses with a 100 percent super-deduction in the current period, has also ceased to be effective.

In 2023, the super-deduction for R&D expenses, which was announced back in 2018, will remain in place until 31 December 2023, i.e., the actual R&D expenses incurred by enterprises in conducting R&D activities, which do not constitute intangible assets but are recognized in Profit and Loss for the current period, can be deducted before CIT on actual basis and with further 75 percent of the actual cost incurred; while R&D expenses that form intangible assets will be amortized before CIT at 175 percent of the cost during the above period.

Here one issue stands out that the 100 percent super-deduction applicable for Q4 2022 will be no longer in effect in 2023. In the first quarter of 2023, the old super-deduction rate of 75 percent shall be applied again in the quarterly CIT deduction if there is no specific announcement to continue the preferential policy of 100 percent super-deduction.

Some of the powerful income tax incentives granted in 2022, especially those announced in the fourth quarter of 2022, have not yet been renewed. As it is currently the Chinese New Year, we reasonably expect that the Chinese tax authorities may still provide stronger incentives to certain industries or small and low-profit enterprises in the following months based on the economic development situation and government guidance. Meanwhile, from our point of view, the Chinese tax authorities will focus their efforts on providing tax reduction measures to assist enterprises to resume business and production and to promote R&D activities and innovation in year 2023. Therefore, it is likely that further preferential tax policy may be given to support the development of certain industries and sectors.