On March 31, 2009, the Ministry of Industry and Information Technology (MIIT) and the State Administration for Taxation (SAT) jointly issued the Circular on Certain Issues Regarding the Business Tax Exemption Available to Credit Guarantee Institutions for Small and Medium-Sized Enterprises, which came into effect on its date of issuance.
The Circular is a continuation of the former preferential business tax (BT) treatments granted to credit guarantee institutions (the Institutions) for small and medium-sized enterprises (SMEs). In addition, it aims to promote and facilitate the loan guarantee and financial services that the Institutions offer to SMEs. Against the backdrop of the current international financial crisis, the Circular seems particularly essential, as the services it supports may help mitigate the financial difficulties that many SMEs are currently facing.
The Circular lists several conditions that Institutions must meet to qualify for the BT exemption. These conditions, which are slightly more restrictive than the ones Institutions faced for former preferential BT treatments, include the following:
- An Institution must be a duly established legal person with a paid-in capital of more than RMB20 million that has been approved by the competent government agency in charge of SMEs, and its main business must be providing credit guarantee to SMEs;
- The Institution must be non-profit, and the service fees it charges for its guarantee business may not exceed 50 percent of the loan interest rate for the corresponding period;
- The Institution must have a sustainable development history of two years or more with a sound internal control mechanism;
- The cumulative amount of the loans guaranteed by the Institution for industrial, agricultural and trading SMEs must account for 80 percent or more of its total guarantee business over the last two years, and the cumulative amount of small loans for less than RMB8 million must account for 50 percent or more of its total guarantee business;
- The balance of the amount guaranteed by the Institution for a single enterprise may not exceed 10 percent of the Institution’s paid-in capital, and the average amount of its guarantee liability may not exceed RMB30 million;
- The ratio of the guaranteed loan amount to the amount of the fund used for guarantee services may not be less than 3 to 1, and the fund used to fulfill the Institution’s guarantee obligations may not exceed 2 percent of the fund used for the whole guarantee service; and
- The Institution must submit relevant operational and financial reports to the competent government agency in charge of SMEs. For those Institutions whose BT tax holidays have expired under previous circulars, they may re-apply for the BT exemption if they meet the foregoing conditions.
The BT exemption will not be available to Institutions automatically. Rather, Institutions must apply in order to be considered for the exemption. First, the provincial government agencies in charge of SMEs and the local taxation authorities will review applications from Institutions that apply. Then, these government agencies and taxation authorities will make recommendations to the MIIT and SAT with respect to which applicants should be granted, and which applicants should not be granted, the BT exemption. Finally, the MIIT and SAT will conduct a final review of the applications and publish a list of Institutions that qualify for the BT exemption. Institutions on the list will be entitled to three years’ BT exemption on the turnover from its guarantee or re-guarantee services (i.e., excluding the turnover from credit rating, consulting, training, etc.) provided to SMEs.