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No Roller Coaster

Free Business in China.

Let me break down why these thresholds matter.

The 5 Million RMB Threshold – Your VAT Tipping Point

As a small business, you likely start as a Small-Scale VAT Taxpayer. In this status, your VAT rate is incredibly low – currently just 1% (thanks to a temporary relief policy), compared to the standard 3%.

This is a huge cash flow advantage.

The trap: The moment your company’s cumulative revenue over any rolling 12-month period exceeds 5 million RMB, you lose that status. You are forcibly converted into a General VAT Taxpayer.

What does that mean for your bottom line? Your VAT rate jumps from 1% to 6%, 9%, or even 13%, depending on your industry. While you can offset input VAT (tax you paid on supplies), the administrative burden increases dramatically, and your pricing strategy may need a complete overhaul.

The 3 Million RMB Threshold – Your Corporate Income Tax Cliff

The second number is about your profit. China offers a massive tax incentive for genuinely small businesses. To qualify as a "Small and Low-Profit Enterprise," you must meet three criteria simultaneously:

If you meet these, your effective Corporate Income Tax (CIT) rate is just 5% .

The cliff: If your taxable profit hits 3,000,001 RMB – just one RMB over – you no longer qualify as a "small" enterprise (assuming no other preferential status like High-Tech). Your CIT rate immediately skyrockets to the standard 25% for all taxable profit not just the amount in excess of 3 million.

tracking two numbers: