Don't Split Income! The Compliance Boundaries of Tax Incentives for Small and Micro Enterprises

However, as these policy dividends were being implemented, some taxpayers whose returns far exceeded their costs began to scheme. By fabricating business entities and artificially splitting revenue, they deliberately kept their operating scale within the thresholds for small and micro enterprises in order to continuously cash in on tax preferences. Such conduct not only betrays the original intention of the tax policies—to help enterprises grow bigger and stronger—but also undermines the principle of tax equity and may even cross legal red lines.

I. Clear Boundaries Set by Tax Policy

On February 25, 2026, the Policy and Regulation Department of the State Taxation Administration released an official Q&A, which defined the tax determination standards and regulatory requirements for income splitting and drew clear boundaries for enterprises' compliant operations.

The core of this policy response is the emphasis on "substance over form," namely, the substance-over-form principle of taxation. In determining whether a taxpayer constitutes income splitting, the tax authorities will no longer rely solely on the number of registered entities in business registration or on contractual relationships in form; instead, they will examine in depth the substantive connections between the business entities. Specifically, regulators will focus on the following elements:

1. Whether the motive is reasonable

Reasonable splitting must conform to industry practice and corporate development strategy and must bring tangible benefits such as improved management efficiency and enhanced market competitiveness. Unreasonable splitting, by contrast, takes tax reduction as its sole or primary purpose: before and after the split, the enterprise's overall operating scale and business structure undergo no substantive change.

2. Whether the businesses are homogeneous

Entities formed through reasonable splitting should possess independent production and operation capabilities and complete business processes, including organizational independence, asset independence, business independence, and financial independence, and should be able to provide complete records of business negotiations, contracts and agreements, and performance documentation. Entities formed through unreasonable splitting, by contrast, often have "multiple licenses at one address"—their registered addresses are virtual office spaces or one and the same address—or act as each other's upstream and downstream parties, or as mutually commissioned operators, without any actual business activities.

3. Whether the transactions are fair

Transactions between entities formed through reasonable splitting must follow the arm's length principle, with prices for goods sold and service fees consistent with comparable market transactions. Unreasonable splitting, by contrast, often shifts profits through low-price sales or free services, thereby reducing the overall tax burden through profit shifting.

II. Typical Patterns of Non-Compliant Splitting

1. Entity splitting

Multiple individually-owned businesses and small/micro enterprises are registered to form a pattern of "one management team, multiple signs": unified control, split revenue, and extraction of small-scale taxpayer exemptions and small low-profit enterprise income tax preferences.

2. Contract splitting

A business with a relatively large contract value or a long performance cycle is artificially divided into multiple independent contracts that are close in time and smaller in amount, so that the value of each individual contract falls below the threshold or critical value for tax preferences.

3. Multiple licenses at one address

Multiple business entities are registered at the same address—or even at a virtual office address—with no independent premises, personnel, or assets; they are independent only in form.

4. Financial period splitting

By exploiting the monthly or quarterly exemption quotas for small-scale VAT taxpayers and controlling the timing of revenue recognition, revenue that should have been recognized in the current period is deferred to the next tax period, so that revenue in each period remains below the exemption standard.

III. A Typical Case in a Key Industry

Due to its business characteristics, the referral services industry has become a high-risk area for income splitting. The industry has the following prominent features: a single controller can easily establish multiple entities with highly homogeneous business scopes, resulting in a high degree of business homogeneity; intermediary business follows the pattern of "collecting advance payments first and issuing invoices later," so enterprises can control the timing of revenue recognition by adjusting the timing of invoice issuance; moreover, the referral services industry has a low dependence on fixed assets, making operations such as "multiple entities at one address" easier to carry out.

Case facts:

Between 2020 and 2022, a business secretarial services company in Guangxi improperly enjoyed the tax preferential policies for small-scale VAT taxpayers and small low-profit enterprises by splitting revenue and repeatedly shifting personnel to affiliated enterprises, underpaying VAT, urban maintenance and construction tax, and corporate income tax totaling RMB 1.1894 million. In May 2024, the Inspection Bureau of the Nanning Tax Bureau of the State Taxation Administration issued a decision on treatment and penalties, ordering the company to pay the unpaid taxes, plus late-payment surcharges and fines, totaling RMB 2.6467 million.

Analysis of the illegal methods:

This intermediary brand set up numerous companies, each registered as an independently accounted small-scale taxpayer, forming a network of affiliated enterprises under the control of the same group. The labor contracts and social insurance of the sales staff were periodically shifted among several affiliated enterprises, but their work was arranged uniformly by the company, with no substantive change in office location, clients, or business; the nominal rotation of personnel concealed the fact that it was the same crew. The same salespersons were managed long-term by the same department of the company; their performance assessments and salaries were coordinated by the company, while the affiliated enterprises merely nominally declared wage costs. After the sales revenue was split, each affiliated enterprise met the corresponding preferential conditions; but if the sales revenue generated by the sales staff were truthfully attributed to a single company, that company's income would far exceed the preferential standards. When collecting payments, the company used its own corporate account or employees' personal accounts to receive business funds, but did not recognize the revenue promptly; instead, it recorded the amounts as advance receipts and left them outstanding on the books for long periods. When customers requested invoices, the company calculated the invoicing amounts of each affiliated enterprise and arranged for the corresponding affiliated enterprises to issue invoices separately, ensuring that no single company's invoiced amount exceeded the preferential limit for small-scale taxpayers.

Consequences of the violation:

IV. The Path to Sustainable Development for Small and Micro Enterprises

With the gradual rollout of the Golden Tax Phase IV system, and facing an increasingly rigorous tax regulatory system, small and micro enterprises should abandon the short-sighted mindset of exploiting policy loopholes and return to the essence of compliant operations.

Compliant operations first require enterprises to establish a genuine business structure. If there are indeed multiple independent business projects or business segments, it should be ensured that each entity has independent business premises, employees, and a financial accounting system, so that formal separation of accounts does not degenerate into passing money "from the left hand to the right hand."

Second, enterprises should strengthen their awareness of tax risk management and establish sound internal tax compliance systems. Before making major business decisions, they should conduct tax impact assessments to avoid crossing legal red lines unknowingly; when facing complex tax issues, they should promptly consult professionals to obtain lawful and compliant solutions.

Finally, enterprises should actively adapt to the new normal of data-driven tax governance. The full launch of the Golden Tax Phase IV system means that tax authorities now possess powerful data integration and analysis capabilities, enabling them to precisely identify abnormal transaction patterns through cross-comparison of multidimensional information such as invoice flows, capital flows, and goods flows. Only by proactively embracing a transparent, digitalized collection and administration environment can enterprises achieve sustainable development on the track of compliance.

If you encounter difficult problems in tax compliance practice, or face tax-related legal risks arising from unclear business boundaries or irregular fund transactions, please feel free to contact us for further consultation. We are dedicated to providing you with high-quality legal services.