The Ministry of Finance and the State Administration of Taxation have recently introduced a series of tax policies to provide fiscal advantages to financial institutions supporting Small and Micro Enterprises and companies investing in R&D. The first grants an exemption from value-added tax (VAT) in China on interest income generated from such loans provided by financial institutions. The second supports research and development (R&D) through a super tax deductions policy, offering a degree of flexibility to firms based on their unique needs.

Preferential tax policies for financial institutions that support the financing of small enterprises

The Ministry of Finance and the State Administration of Taxation have recently introduced a series of measures to provide fiscal advantages to financial institutions supporting Small and Micro Enterprises. These measures are outlined in "Announcement No. 13" and "Announcement No. 16," both issued in 2023.

Announcement No. 13 targets financial institutions that provide small loans to small enterprises, micro-enterprises, and individual industrial and commercial entities. It grants an exemption from value-added tax (VAT) on interest income generated from such loans. This policy aims to encourage financial support for Small and Micro Enterprises by reducing the tax burden on these institutions.

Announcement No. 16 provides further clarification and additional guidelines regarding VAT exemption for interest income on loans provided by financial institutions. It introduces two key options for financial institutions.

1.    Loans with interest rates not exceeding the loan market quotation rate announced by the National Interbank Funding Center (up to 150% of Loan Prime Rate) are eligible for VAT exemption. Loans with interest rates surpassing this threshold are subject to standard tax policies.

2.    For loans with terms ranging from 1 to 5 years, financial institutions can choose either the 1-year loan market interest rate or the rates for loans exceeding 5 years, as specified in "Document No. 91," to apply the VAT exemption policy.

Additionally, Announcement No. 16 refines the definition of "financial institutions" for VAT exemption eligibility:

1.    In 2023, financial institutions must pass the "two increases and two controls" assessment by regulatory authorities. This assessment evaluates the growth rate of small and micro enterprise loans and loan balance maintenance.

2.    From 2024 to 2027, financial institutions must meet loan growth targets for small and micro enterprises set by regulatory authorities. The performance is assessed by the State Administration of Financial Supervision and its dispatched agencies. 

These measures collectively aim to incentivize financial institutions to provide more support to small firms by reducing the tax burden on interest income from small loans. By defining specific criteria for VAT exemption eligibility and allowing flexibility in choosing interest rates, the government aims to streamline the application of these policies, making it easier for financial institutions to provide the necessary financial support to small enterprises.

At PHC Advisory, we can offer you full support on matters regarding doing business in China, or any other issues your business may face in China. If you would like to know more about policies relevant to your business in China, please contact us at info@phcadvisory.com.

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The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not create any legal obligations between PHC Advisory and the reader. 

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