Corporate income tax rates for small and medium enterprises (SMEs): Is your company eligible for 15% or 17%?

As the State continues to strengthen policies supporting the small and medium-sized enterprise (SME) sector, preferential corporate income tax (CIT) rates of 15% or 17% have become a topic of significant interest among businesses. However, not all SMEs are automatically entitled to lower tax rates, and in practice, many enterprises misunderstand or incorrectly apply these incentives.

From a legal and accounting-tax advisory perspective, this article helps businesses determine whether their company is eligible for the 15% rate, the 17% rate, or must continue applying the standard CIT rate.

1. Understanding the nature of the 15% and 17% CIT rates for SMEs

The 15% and 17% CIT rates for SMEs are conditional tax incentives, designed to:

• Reduce the tax burden for small and medium-sized enterprises
• Enhance capital accumulation and reinvestment capacity
• Encourage compliance with accounting and tax regulations

Important note: These incentives are not determined by the “SME” label, but are based on specific legal criteria and the enterprise’s actual operating conditions.

2. Criteria for determining eligibility for the 15% or 17% CIT rate

In practice, the applicable 15% or 17% tax rate is determined based on the enterprise’s size, assessed through factors such as:

• Annual revenue
• Number of employees participating in compulsory social insurance
• Total capital or total assets

Generally:

• Smaller-scale enterprises may qualify for the 15% CIT rate
• Medium-scale enterprises may apply the 17% CIT rate

Enterprises that exceed the prescribed thresholds during a fiscal year may no longer qualify for the preferential rate for that tax period.

3. Cases where SMEs are not eligible for the 15% or 17% preferential CIT rate

Even if size criteria are met, enterprises will not be eligible for the preferential tax rates if they fall into any of the following categories:

• Operating in sectors excluded from tax incentives under applicable regulations
• Failure to fully comply with accounting, invoicing, and documentation requirements
• Engaging in tax law violations
• Failure to declare, or incorrect declaration of, the application of preferential tax rates
• Having related-party relationships as defined under tax regulations (including relationships involving capital, management, control, or transactions with related parties)

Special note:
Under current regulations, enterprises with related-party relationships are not eligible for the 15% or 17% preferential CIT rates for SMEs, in order to prevent artificial business fragmentation or profit shifting to benefit from tax incentives.

In tax inspections and audits, this category is considered high-risk and is subject to close scrutiny by tax authorities.

4. Applying preferential tax rates: More than just “Using a lower rate”

A common misconception is that: “As long as we are an SME, we can simply apply the 15% or 17% tax rate.”
In reality, enterprises must:

• Identify the correct tax year in which the incentive applies
• Apply the appropriate tax rate corresponding to the enterprise’s size in each period
• Accurately declare the rate in the CIT finalization dossier
• Maintain documentation proving SME eligibility

If incorrectly applied, enterprises may face:

• Back taxes (tax arrears)
• Late payment penalties
• Penalties for incorrect declarations

5. What should enterprises do to determine whether they qualify for 15% or 17%?

We recommend that SMEs:

• Review revenue, workforce size, and capital on an annual basis
• Compare actual data against current legal criteria
• Check whether business lines fall under incentive-excluded sectors
• Assess related-party relationships, if any, under tax regulations
• Consult accounting and tax advisors before tax finalization

Correctly determining the applicable tax rate from the outset enables enterprises to:

• Avoid legal risks
• Better manage cash flow
• Optimize tax costs in a lawful manner

The 15% or 17% CIT rate for small and medium-sized enterprises (SMEs) is not applied based on perception or business labels, but depends on specific legal criteria, the enterprise’s actual status in each fiscal year, and whether related-party relationships exist.

SMEs should approach this policy with the mindset of: Applying the incentives correctly, fully, and in a timely manner, rather than merely applying a “lower rate.”

The support of experienced legal and accounting-tax advisors will help enterprises accurately determine the applicable tax rate, while effectively managing risks of tax reassessment and penalties in the future.