Policy Interpretation: STA Announcement on Income Tax Incentives for Small Low-Profit Enterprises and Individual Households

According to the provisions of the "Announcement of the Ministry of Finance and the State Administration of Taxation on the Implementation of Preferential Income Tax Policies for Small and Micro Enterprises and Individual Industrial and Commercial Households" (2021 No. 12), the State Administration of Taxation issued the "Announcement of the State Administration of Taxation on Matters Concerning the Implementation of Preferential Income Tax Policies to Support the Development of Small and Micro Enterprises and Individual Industrial and Commercial Households" (hereinafter referred to as the "Announcement"). The following is an interpretation:

I. Why was the Announcement formulated and issued?

       In order to implement the decisions and arrangements of the Party Central Committee and the State Council, further help market entities restore vitality and enhance dynamism, and support the development of small and micro enterprises and individual industrial and commercial households, the Ministry of Finance and the State Administration of Taxation jointly issued the "Announcement of the Ministry of Finance and the State Administration of Taxation on the Implementation of Preferential Income Tax Policies for Small and Micro Enterprises and Individual Industrial and Commercial Households" (2021 No. 12), which stipulates that for the part of the annual taxable income of small and micro enterprises and individual industrial and commercial households not exceeding RMB 1 million, on the basis of the existing preferential policies, the income tax shall be reduced by half again (hereinafter referred to as the "half‑reduction policy"). In order to promptly clarify the implementation rules of the policy and ensure that the tax reduction policy is fully implemented and that market entities enjoy the benefits they are entitled to, we formulated and issued this Announcement.

II. What is the scope of application of the tax preferential policy?

       From January 1, 2021 to December 31, 2022, for the part of the annual taxable income of small and micro enterprises and individual industrial and commercial households not exceeding RMB 1 million, on the basis of the existing preferential policies, the income tax shall be reduced by half again. Small and micro enterprises and individual industrial and commercial households, regardless of their collection method, can all enjoy the half‑reduction policy.

III. What are the procedures for enjoying the tax preferential policy?

       Small and micro enterprises and individual industrial and commercial households can enjoy the half‑reduction policy both when making advance payments and when filing annual final settlements. There is no need for filing for the policy; they can enjoy it by filling in the relevant columns of the enterprise income tax return, or the individual income tax return and the report on tax reduction and exemption matters. For small and micro enterprises and individual industrial and commercial households that file through the electronic tax bureau, the tax authorities will automatically provide pre‑filling services for this policy in the returns and reports (only for individual income tax). For individual industrial and commercial households with fixed quotas that use simplified declaration, the tax authorities will collect the tax according to the reduced amount.

IV. Has the criteria for determining small and micro enterprises changed?

       The criteria for determining small and micro enterprises still follow the relevant provisions of the "Announcement of the State Administration of Taxation on Issues Concerning the Implementation of Inclusive Income Tax Reduction Policies for Small and Micro Enterprises" (2019 No. 2). That is, a small and micro enterprise refers to an enterprise engaged in industries not restricted or prohibited by the state, and that simultaneously meets the three conditions of annual taxable income not exceeding RMB 3 million, the number of employees not exceeding 300, and total assets not exceeding RMB 50 million. When making advance payments of enterprise income tax, the indicators of total assets, number of employees, and annual taxable income of small and micro enterprises shall be determined temporarily based on the situation up to the end of the current period covered by the declaration.

V. How are the actual income tax payable and the tax reduction amount for small and micro enterprises calculated?

       For the part of the annual taxable income of small and micro enterprises not exceeding RMB 1 million, and the part exceeding RMB 1 million but not exceeding RMB 3 million, they are respectively included in the taxable income at a reduced rate of 12.5% and 50%, and enterprise income tax is paid at the tax rate of 20%. An example is as follows:

      [Example 1] Enterprise A is determined to meet the conditions for a small and micro enterprise. When making the advance payment of enterprise income tax for the first quarter of 2021, the corresponding taxable income is RMB 500,000. Then the actual income tax payable by Enterprise A = 500,000 × 12.5% × 20% = RMB 12,500. The tax reduction amount = 500,000 × 25% - 12,500 = RMB 112,500. When making the advance payment of enterprise income tax for the second quarter, the corresponding accumulated taxable income is RMB 1.5 million. Then the actual income tax payable by Enterprise A = 1,000,000 × 12.5% × 20% + (1,500,000 - 1,000,000) × 50% × 20% = 25,000 + 50,000 = RMB 75,000. The tax reduction amount = 1,500,000 × 25% - 75,000 = RMB 300,000.

VI. How can individual industrial and commercial households that obtain business income from multiple sources enjoy the preferential policy?

       According to current policy, taxpayers who obtain business income from two or more sources shall choose to file an annual consolidated return with the competent tax authority in charge of the management of one of the business locations. If an individual industrial and commercial household obtains business income from two or more sources, when filing the annual consolidated tax return, it shall combine the annual taxable income from business operations of the individual industrial and commercial household, recalculate the tax reduction amount, and make up the shortfall or refund the excess. An example is as follows:

      [Example 2] Taxpayer Zhang operates both Individual Industrial and Commercial Household A and Individual Industrial and Commercial Household B, with annual taxable incomes of RMB 800,000 and RMB 500,000 respectively. When Zhang files the annual consolidated tax return, the taxable income eligible for the half‑reduction policy on individual income tax is RMB 1 million.

VII. How is the tax reduction amount for individual industrial and commercial households calculated?

       To enable taxpayers to accurately enjoy the tax policy, the Announcement specifies the formula for calculating the tax reduction amount:

Tax reduction amount = (Tax payable on the part of taxable income from business operations of the individual industrial and commercial household not exceeding RMB 1 million - Tax reduction from other policies × (Taxable income from business operations of the individual industrial and commercial household not exceeding RMB 1 million ÷ Total taxable income from business operations)) × (1 - 50%)

Examples are as follows:

      [Example 3] Taxpayer Li operates Individual Industrial and Commercial Household C, with an annual taxable income of RMB 80,000 (applicable tax rate 10%, quick deduction 1,500), and can also enjoy a tax reduction of RMB 2,000 under the policy for the disabled. Then the tax reduction amount for Li under this policy = [(80,000 × 10% - 1,500) - 2,000] × (1 - 50%) = RMB 2,250.

      [Example 4] Taxpayer Wu operates Individual Industrial and Commercial Household D, with an annual taxable income of RMB 1,200,000 (applicable tax rate 35%, quick deduction 65,500), and can also enjoy a tax reduction of RMB 6,000 under the policy for the disabled. Then the tax reduction amount for Wu under this policy = [(1,000,000 × 35% - 65,500) - 6,000 × 1,000,000 ÷ 1,200,000] × (1 - 50%) = RMB 139,750.

       In fact, this calculation rule has been embedded in the information system of the electronic tax bureau. The tax authorities will provide pre‑filling services for the returns and reports for taxpayers. Taxpayers who meet the conditions can accurately and truthfully fill in the business data, and the system will automatically calculate the tax reduction amount.

VIII. Can individual industrial and commercial households that have already paid tax on their business income this year still enjoy the preferential policy?

       To maximise the release of tax reduction benefits to taxpayers, individual industrial and commercial households that have already paid tax on their business income this year can also enjoy the tax preference. The specific method is: for taxes already paid between January 1, 2021 and before the issuance of this Announcement, the tax can be automatically offset against the tax payable in subsequent months; any amount not fully offset within the year can be refunded when filing the final settlement; alternatively, they may directly apply for a refund of the tax reduction amount.

IX. When an individual industrial and commercial household applies for an invoice on behalf of the taxpayer for freight transportation, is individual income tax still prepaid?

       According to current policy, when an individual industrial and commercial household applies for an invoice on behalf of the taxpayer for VAT on freight transportation services, individual income tax is required to be prepaid. To further reduce the individual income tax burden at the stage of invoicing for freight transportation services and to regulate the management of business income collection, the Announcement stipulates that from April 1, 2021, when individual industrial and commercial households, sole proprietorship enterprises, partnerships, and individuals apply for VAT invoices on behalf of the taxpayer for freight transportation services, the tax authorities will no longer prepay individual income tax; instead, taxpayers shall declare and pay the tax on their own in accordance with the law.

Link: "Announcement of the State Administration of Taxation on Matters Concerning the Implementation of Preferential Income Tax Policies to Support the Development of Small and Micro Enterprises and Individual Industrial and Commercial Households" (Announcement of the State Administration of Taxation [2021] No. 8)

Source: State Administration of Taxation