Towards the end of 2019, novel coronavirus (COVID-19)-infected pneumonia started to break out in the sprawling capital of Central China's Hubei province, Wuhan. In the weeks that followed, Chinese authorities embarked on a crusade against novel coronavirus, as fears of a widespread epidemic nationwide deepened. The extreme measures that China took to keep a tight rein on the virus seem to have worked as cases of COVID-19 have steadily plummeted since peaking in mid-February – but at what cost? With the stringent quarantine measures and travel bans imposed by the Chinese government to contain the spread of the novel coronavirus, the whole Chinese economy has been brought to a near standstill. Reports of failing small and medium-sized enterprises (SMEs) trickling out of the country have become a common occurrence.
To help these enterprises recover fast, central government authorities, along with many provincial and local governments, have introduced several fiscal policies and tax incentives. How much can these measures nourish the Chinese economy remains to be seen! This blog intends to guide you about the latest policies and their eligibility requirements.
Central tax policies to support enterprises in the epidemic battle
Government departments, including the Ministry of Finance (MOF) and the State Taxation Administration (STA), have released three key documents, laying out a string of tax reliefs and preferential measures concerning corporate income tax, value-added tax, and individual income tax.
- Tax deductions, refunds, and exemptions to support business production capacity.
Subject to Announcement No. 8, enterprises manufacturing key supplies and materials indispensable for preventing and containing the COVID-19 outbreak are entitled to receive a one-time full deduction on their corporate income tax on facilities payments. Eligible enterprises can also apply to the competent tax authorities every month to fully refund the incremental VAT credit incurred after completing the current VAT tax declaration period within the VAT tax filing period. In addition to that, enterprises seriously affected due to the epidemic (for example, enterprises engaged in transportation, catering, accommodation and tourism sectors) will be entitled to a longer tax loss carry-forward period of up to 8 years, extended from 5 years. However, in order to be eligible, the revenue from the main business of seriously affected enterprises in 2020 must make up for more than 50 per cent of their total earnings (excluding non-taxable income and investment returns).
- Donations made to NPOs and government departments eligible for full deduction on taxable income.
Enterprises that are actively making donations of cash or materials used to respond to the COVID-19 outbreak through national and local governments, through qualified social organizations, through qualified charitable foundations or directly to the hospitals are able to enjoy a full deduction on their corporate income tax. In addition to this, any donation of self-produced, commissioned, or purchased materials that can be used to prevent and contain the outbreak through the eligible channels mentioned above shall be exempt from value-added tax, consumption tax, urban maintenance and construction tax and education surcharge.
- Temporary import exemption granted for goods donated in response to novel coronavirus.
China's Ministry of Finance, the General Administration of Customs (GACC), and the State Taxation Administration have also temporarily broadened the tax exemption for imported goods that are donated to help prevent the further spread of the novel coronavirus and control the epidemic. The range of imported goods subject to the tax exemption is expanded to include virus infection testing supplies, disinfection supplies, virus prevention supplies (e.g., protective devices/gear), and assistance vehicles (e.g., trucks providing disinfectant services, ambulances). The tax collected on the exempted imported goods is to be fully refunded.
Regional tax measures to support enterprises in the epidemic battle
Many provincial and local governments have also introduced further tax policies to assist local businesses during this period of coronavirus prevention and control.
Let us take a look at the measures issued in the country's biggest city Shanghai, which is also where our China office is located:
- Shanghai branches of development banks, policy banks and large state-owned commercial banks, as well as Shanghai-incorporated banks, are encouraged to offer concessional loans with an interest rate of less than 1.6 per cent to enterprises playing critical roles in the epidemic prevention. These include SMEs that manufacture, transport and sell crucial COVID-19 prevention and control supplies and daily necessities.
- For requisitioned enterprises that have implemented an emergency technical renovation project to produce the epidemic prevention materials, financial subsidies will be granted to cover anywhere between 50 per cent and 80 per cent of the total cost of the subsequent technology upgrading. In addition to that, up to 100 per cent compensation will be offered by the government to cover investment made by requisitioned enterprises to boost manufacturing capacity of designated categories of epidemic prevention materials.
- Enterprises leasing non-residential assets from state-owned enterprises (including all kinds of development zones and industrial parks, start-up bases and high-tech incubators, etc.) to engage in production and commercial activities will have their rent for the months of February and March waived off.
- For enterprises that have difficulties in filing taxation within the statutory time limit due to the impact of the novel coronavirus epidemic, a deferring of tax payment in compliance with applicable laws and regulations for up to 3 months is to be granted. The relevant tax authority may spare corresponding charges of delayed tax payment and administrative fines against enterprises for overdue tax declaration or payment due to the COVID-19 epidemic.
- Enterprises engaged in the travel sector with a good reputation and creditworthiness are entitled to up to 80 per cent temporary refund on their Travel Agencies' Service Quality Deposit.
- Eligible employers without layoffs or reduced staffs will be refunded up to 50 per cent of the total actual unemployment insurance premium paid by employers and their employees in the previous year.
- The payment rate of employee's medical insurance is to be reduced by 0.5 per cent in 2020, provided that the level of medical insurance benefits of the insured does not compromise and the medical insurance system operates steadily.
- The rate of financing guarantee fee for new loan applications from enterprises is to be cut down to 0.5 per cent per year, the re-guarantee fee rate is to be cut by half, and the fee for guarantee loans is to be waived.
- For all kinds of enterprises in Shanghai affected by the epidemic, those who organize employees (including dispatched workers) to take online vocational training during the operation suspension period are entitled to training subsidies of up to 95 per cent of the actual training cost, provided by district-level additional special fund for education for enterprise employees.
Apart from Shanghai, other local authorities are also offering incentives to aid regional enterprises.
For example, in Beijing, several types of administrative fees, such as specialised equipment inspection fees, sewage treatment fees, and road occupation fees, are suspended of charging against SMEs affected during the COVID-19 epidemic. For SMEs that lease the state-owned assets, if they resume or stop their production and operation activities as required by the government without layoff or few layoffs, the rent for the month of February is to be waived off. In addition to that, if the enterprise is using the rental property for office use, then February's rent is to be reduced by 50 per cent. For science and technology SMEs in Zhongguancun Science Park, a grant of up to RMB 200,000 in research and development costs may be awarded to each enterprise.
These preferential fiscal policies and tax incentives apply to both domestic enterprises as well as foreign-invested ventures. If your enterprise in China meets the above-mentioned eligibility requirements – e.g., if you run an enterprise that is severely affected due to the COVID-19 epidemic or is actively engaged in the anti-epidemic related business or you are renting a property from an SOE or located in a qualified industrial zone – you need to take prompt action to reach out to your local tax, finance, customs and labour authorities to seek their economic support.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.