To support the economic growth of small and medium enterprises post-Covid, the Chinese Ministry of Finance announced a corporate income tax break for small and micro-sized enterprises starting from January 2021 and due to end in December 2022. Closing in on the second half of this tax-break period, it’s important for new business owners to first of all, know that there is a SME tax break policy in China available to them and understand the conditions of the tax break.
The tax break policy states that small and medium-sized companies with an annual taxable income not exceeding 1 million yuan will have their taxable income reduced by 12.25%, while any taxable income between 1 to 3 million yuan will be reduced by 50%. This policy is effective from January 1st 2021 to December 31st 2022.
How to enjoy the tax incentives
Enterprises and individual entrepreneurs can enjoy the reduction policy in both prepayment and remittance of income tax. It can be done by filling out the enterprise income tax return and the tax reduction report form. For enterprises and individual entrepreneurs filing through the electronic tax bureau, the taxation authorities will automatically provide them with the pre-filling service for this policy in the declaration form and the report form (only for individual income tax). For the fixed-rate individual entrepreneurs with simple declaration, the taxation authority will make tax payment according to the reduced tax amount.
Criteria for SMEs
An SME is one that is engaged in an industry that is not restricted or prohibited by the State and meets the requirements of annual taxable income not exceeding 3 million yuan, the number of employees not exceeding 300, and the total assets not exceed 50 million yuan.
Calculations of tax deductions for SMEs
An SME with an annual taxable income not exceeding 1 million yuan will have this figure reduced by 12.5%. An SME with an annual taxable income between 1 million yuan and 3 million yuan will have this figure reduced by 50%. The enterprise income tax shall be paid at a tax rate of 20%. Examples are as follows.
Enterprise A qualifies as a small and slightly profitable enterprise. When paying enterprise income tax in the 1st quarter of 2021, the corresponding taxable income is 500,000 yuan, then the actual amount of income tax payable by enterprise A = 50×12.5%×20%=12.5 million yuan. Tax reduction = 50 × 25% – 1.25 = 112,500 yuan. When the enterprise income tax is prepaid in the 2nd quarter, the corresponding accumulated taxable income is 1.5 million yuan, then the actual income tax payable by enterprise A = 100×12.5%×20%+(150-100)×50%×20%=2.5+5=75,000 yuan. Tax reduction = 150×25%-7.5=300,000 yuan.
How to enjoy the preferential policy for individual entrepreneurs who obtain multiple business income?
According to current policy, if a taxpayer obtains business income from more than two places, he/she should choose to file an annual summary declaration with the competent tax authority in one of the places of business management. If an individual entrepreneur obtains business income from more than two places, the annual taxable income of the individual industrial and commercial household shall be combined and the tax reduction amount shall be recalculated when filing the annual summary tax return, and the excess shall be refunded to the lesser amount. Examples are as follows.
Taxpayer Zhang operates both Individual Business A and Individual Business B. The annual taxable income is 800,000 yuan and 500,000 yuan respectively, so the taxable income that Zhang can enjoy the policy of 50% reduction of individual income tax is 1 million yuan when he files the annual summary tax return.
How to calculate the tax reduction amount for individual entrepreneurs?
In order for taxpayers to enjoy the tax policy accurately, the Announcement stipulates the formula for calculating the amount of tax reduction. Tax reduction amount = (taxable amount of the part of taxable income of individual entrepreneurs not exceeding 1 million yuan from operation – tax reduction amount of other policies × taxable income of individual entrepreneurs not exceeding 1 million yuan from operation ÷ taxable income from operation) × (1-50%)
Taxpayer Li Mou operates individual business enterprise C. The annual taxable income is 80,000 yuan (applicable tax rate is 10%, quick deduction is 1500), and at the same time, he can enjoy the tax deduction of 2000 yuan for the disabled policy, then the tax deduction of Li Mou for this policy = [(80,000 × 10% – 1500) – 2000] × (1-50%) = 2250 yuan.
Taxpayer Wu operates an individual business enterprise D, with annual taxable income of 1,200,000 yuan (applicable tax rate of 35%, quick deduction of 65500), and at the same time, he can enjoy the tax deduction of 6,000 yuan for the disabled. The tax deduction for the disabled policy is 6,000 yuan, so the tax deduction for Li = [(1000000×35%-65500)-6000×1000000÷1200000] × (1-50%) = 139,750 yuan.
In fact, this calculation rule we have embedded in the information system of electronic tax bureau. Taxation authorities will provide taxpayers with pre-filling services for declaration forms and report forms. The system can automatically calculate the amount of tax reduction if the eligible taxpayers accurately and truthfully fill in the data of business situation.
Can individual entrepreneurs who have paid taxes on their business income this year still enjoy the preferential policies?
In order to release the tax reduction dividend to the taxpayers to the greatest extent, the individual entrepreneurs that have already paid taxes on their business income this year can also enjoy the tax benefits. The specific method is that from January 1, 2021 From January 1, 2021 to the issuance of this announcement, the individual entrepreneurs who have already paid individual income tax on business income for the current year can automatically offset the tax for the following months, and those who do not finish the offset for the current year can apply for tax refund during the remittance. The tax can be refunded during the year of remittance; or directly apply for the refund of the tax to be reduced.
- When an individual entrepreneur applies for issuing freight invoices on behalf of his business, is there still a personal income tax levied in advance?
According to the current policy, when individual entrepreneurs issue VAT invoices on behalf of goods transportation industry, they are required to collect personal income tax in advance. In order to further reduce the burden of personal income tax in the invoicing of goods transportation industry and regulate the management of business income collection, the Announcement stipulates that from April 1, 2021, when individual industrial and commercial households, sole proprietorships, partnerships and individuals apply for the invoicing of VAT invoices for goods transportation industry, the tax authorities will no longer levy personal income tax in advance, but the taxpayers will declare and pay it by themselves according to the law.