Policy Content

On March 26, 2023, the State Taxation Administration issued a tax policy announcement to support the development of small and micro enterprises and individual businesses. According to “Announcement of the Ministry of Finance and the State Administration of Taxation on Preferential Policies on Income Tax for Small and Micro Enterprises and Individual Businesses”, the policy includes the following measures:

1. For small and micro enterprises whose annual taxable income does not exceed RMB 1 million, 25% of the taxable income will be deducted and the remaining amount will be taxed at a 20% corporate income tax rate.
2. For individual businesses whose annual taxable income does not exceed RMB 1 million, in addition to the existing preferential policies, the individual income tax will be levied at half the normal rate.
3. The definition of small and micro enterprises refers to enterprises engaged in non-restricted or prohibited industries, whose annual taxable income does not exceed RMB 3 million, whose number of employees does not exceed 300, and whose total assets do not exceed RMB 50 million. The number of employees includes the number of employees with labor contracts and the number of dispatched workers. The average quarterly values will be used to determine the annual number of employees and total assets.

The policy is effective from January 1, 2023 to December 31, 2024.

Scope of Policy Application

Small and micro-profit enterprises refer to resident enterprises that meet the requirements set by the Ministry of Finance and the State Administration of Taxation to enjoy preferential policies for small and micro-profit enterprise income tax. Currently, resident enterprises can enjoy the preferential policy for small and micro-profit enterprise income tax according to the relevant provisions of the "Announcement of the Ministry of Finance and the State Administration of Taxation on Further Implementing Preferential Policies for Small and Micro Enterprises Income Tax" (No. 13 of 2022) and the "Announcement of the Ministry of Finance and the State Administration of Taxation on Preferential Policies for Income Tax of Small and Micro Enterprises and Individual Businesses" (No. 6 of 2023). If the policy is adjusted in the future, it will be based on its provisions.

For branch offices established by enterprises without legal personality, the current enterprise income tax adopts the corporate tax system, and the enterprise should calculate and pay enterprise income tax based on the legal person as the main body. Article 50, paragraph 2 of the Enterprise Income Tax Law of the People's Republic of China stipulates that if a resident enterprise establishes a non-legal person business operation within China, it shall aggregate the number of employees, total assets, and annual taxable income of the main body and its branch offices and pay enterprise income tax accordingly. Therefore, for branch offices established by enterprises without legal personality, they should first aggregate the number of employees, total assets, and annual taxable income of the main body and its branch offices, and then determine whether they meet the conditions for small and micro-profit enterprises based on the total of each indicator.

Policy Processing Procedures

Small and micro-profit enterprises that meet the conditions can enjoy preferential policies conveniently by filling out tax declaration forms without other procedures. Small and micro-profit enterprises should accurately report basic information such as the number of employees, total assets, and national restricted or prohibited industries, and after calculating the taxable income, the information system will use relevant data to intelligently pre-fill preferential projects and automatically calculate the amount of tax reduction.

Future Impact

The release of this policy will have a positive impact on the income tax reduction and deduction policies for small and micro enterprises and individual businesses. These tax incentives are designed to support the development of small and micro enterprises and individual businesses. Small and micro enterprises and individual businesses can reduce their income tax burden and increase their operating profits by deducting 50% of the taxable income or adding deductible cost expenses, thereby expanding their business scope, increasing employment rates, and promoting economic growth.

In addition, tax authorities actively provide tax preferential services for small and micro enterprises and individual businesses, which helps improve their compliance and tax awareness, and reduce illegal behavior and tax evasion.

Case Study

Company A was established in 2022, engaged in industries that are not restricted or prohibited by the state. In the first quarter of 2023, the number of employees at the beginning and end of the quarter were 120 and 200, respectively. The total assets at the beginning and end of the first quarter were 20 million and 40 million yuan, respectively. The taxable income for the first quarter was 900,000 yuan.

Analysis: In the first quarter of 2023, the average number of employees at A company was 160 and the average total assets were 30 million yuan. The taxable income was 900,000 yuan. It meets the criteria for small and micro-profit enterprises to enjoy preferential policies when prepaying corporate income tax: engaged in industries that are not restricted or prohibited by the state, and at the same time, the quarterly average total assets at the end of the prepayment declaration period do not exceed 50 million yuan, the quarterly average number of employees does not exceed 300, and the taxable income does not exceed 3 million yuan.

According to the "Announcement of the Ministry of Finance and the State Administration of Taxation on Preferential Policies for Small and Micro Enterprises and Individual Industrial and Commercial Taxpayers" (No. 6 of 2023), for the part of the annual taxable income of small and micro-profit enterprises that does not exceed 1 million yuan, a 25% reduction will be made and calculated into the taxable income, and a 20% tax rate will be applied to pay corporate income tax. Therefore, the payable tax amount for the first quarter of company A is: 90 × 25% × 20% = 4.5 (million yuan)，the overall tax rate reduced to 5%.