The Ministry of Finance ("MOF") and the State Taxation Administration ("STA") have recently issued the Announcement on the Pre-tax Deduction Policy for Loss Reserves for Agriculture-related Loans and Loans to Small- and Medium-sized Enterprises Issued by Financial Enterprises (the "Announcement No.85") and the Announcement on the Policy for Pre-EIT Deduction of Loan Loss Reserves of Financial Enterprises (the "Announcement No.86"), both of which are retrospectively effective from January 1, 2019 to December 31, 2023.
The Announcement No.85 reads that the loan loss reserves withdrawn at certain rates (2% for the special mention category, 25% for the substandard category, 50% for the doubtful category, and 100% for the loss category) by financial enterprises according to the Guidelines for Risk-based Loan Classification, after the risk-based classification of agriculture-related loans and loans to small- and medium-sized enterprises (SMEs) they have issued, may be deducted when the taxable income is calculated. The Announcement No.86 clearly specifies the scope of loan assets for which the loan loss reserves are allowed to be withdrawn before enterprise income tax (EIT) and the formula for calculating the amount of loan loss reserves that financial enterprises are allowed to deduct from the current year's taxable base for EIT.