14. Income taxes

Cayman Islands

X Financial is a company incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, the Company is not subject to tax on either income or capital gain.

Hong Kong

Under the current Hong Kong Inland Revenue Ordinance, YZT (HK) Limited and YX (HK) Limited, subsidiaries of the Group located in Hong Kong, are subject to a two-tiered profits tax rates for taxable income earned in Hong Kong for the years ended December 31, 2023, 2024 and 2025. The first HK$2.0 million Hong Kong dollars of profits earned by a company are subject to be taxed at an income tax rate at 8.25%, while the remaining profits will continue to be taxed at the existing tax rate, 16.5%. No income tax expense for these entities has been recognized in the consolidated financial statements as they have no assessable income for the years ended December 31, 2023 and 2024. For the year ended December 31, 2025, the income tax expense recognized for these entities was immaterial.

Chinese Mainland

Under the Law of the PRC on Enterprise Income Tax (the “EIT Law”), the Company’s subsidiaries, VIEs and subsidiaries of the VIEs established in the Chinese Mainland are subject to an income tax rate of 25% for the years presented. However, certain entities are eligible for preferential tax treatments. Specifically, one subsidiary is granted a 15% preferential income tax rate as a qualified enterprise under an incentive regime through 2027. Additionally, under a different incentive regime, one VIE and two other subsidiaries, operating in a specific preferential tax jurisdiction, are subject to a reduced income tax rate of 15% through 2027; of these two subsidiaries, one became eligible for such reduced tax rate starting from 2025. Furthermore, a subsidiary established in 2025, operating in another specific preferential tax jurisdiction, was eligible for a reduced income tax rate of 15% through 2030.

Uncertainties exist with respect to how the current income tax law in the Chinese Mainland applies to the Group’s overall operations, and more specifically, with regard to its tax residency status. The EIT Law includes a provision specifying that legal entities organized outside of the Chinese Mainland will be considered residents for Chinese Income Tax purposes if the place of effective management or control is within the Chinese Mainland. The implementation rules to the EIT Law provide that non-resident legal entities will be considered Chinese Mainland residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting and properties, occurs within the Chinese Mainland. Despite the present uncertainties resulting from the limited Chinese Mainland tax guidance on the issue, the Group does not believe that the legal entities organized outside of the Chinese Mainland within the Group should be treated as residents for EIT Law purposes and, therefore, has not recorded an unrecognized tax benefit for this tax position. If the Chinese Mainland taxing authorities subsequently determine that the Company and its subsidiaries registered outside the Chinese Mainland should be deemed resident enterprises, the Company and its subsidiaries registered outside the Chinese Mainland would be subject to Chinese Mainland income taxes, at a statutory income tax rate of 25%.

According to PRC Administration of the Levy and Collection of Taxes Law, the statute of limitations is three years if an underpayment of taxes is due to computational errors made by the taxpayer or withholding agent. The statute of limitations will be extended five years under special circumstances, which are not clearly defined (but an underpayment of tax liability exceeding RMB0.1 million is specifically listed as a special circumstance). In the case of a related party transaction, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. Tax years from 2015 to the current year for the Group’s Chinese Mainland subsidiaries are subject to examination by the Chinese Mainland taxing authorities.

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Current tax expense and deferred tax expense (benefit), which are substantially all for Chinese Mainland income taxes, are as follows:

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Income before income taxes for different jurisdictions is shown as follows:

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A reconciliation between income tax expense computed by applying the Chinese Mainland income tax rate of 25%, the income tax jurisdiction where the Group has substantially all of its operations, to income before income taxes and the reported amount of income tax expense for the years ended December 31, 2023, 2024 is as follows:

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A reconciliation between income tax expense computed by applying the Chinese Mainland income tax rate of 25%, the income tax jurisdiction where the Group has substantially all of its operations, to income before income taxes and the reported amount of income tax expense for the year ended December 31, 2025 pursuant to the new disclosure requirements of ASU 2023-09 (See Note 1(al)) is as follows:

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The tax effects of temporary differences and carry forwards that give rise to the deferred tax balances at December 31, 2024 and 2025 are as follows:

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Movement of the valuation allowance is as follows:

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The Company operates through its subsidiaries, VIEs and subsidiaries of the VIEs. The valuation allowance is considered on an individual entity basis.

An entity of the Group has completed its deregistration in 2025 and the gross deferred tax assets and the corresponding valuation allowance associated with this entity, amounting to RMB159,532,567 (US$22,812,854) and RMB159,532,567 (US$22,812,854), respectively, were written off. These write-offs had no net impact on the Group’s income tax expense or net income for the year ended December 31, 2025.

As of December 31, 2024 and 2025, the Company had operating loss carryforwards of RMB178,363,447 and RMB15,557,819 (US$2,224,739) respectively from its subsidiaries, VIEs and subsidiaries of the VIEs registered in the Chinese Mainland. The net operating loss carryforwards will expire in years 2026 to 2030, if not utilized.

The tax benefit, net of valuation allowance, recognized during the years ended December 31, 2023, 2024 and 2025 due to the generation of net operating losses carryforwards that can be carried forward to future years amounted to RMB883,214, nil and nil, respectively. The tax benefit realized during the year ended December 31, 2023, 2024 and 2025 from the utilization of carryforwards where the related deferred tax asset was offset by a valuation allowance amounted to RMB4,876,301, RMB233,258 and RMB1,821,356 (US$260,450) respectively.

The tax benefit, net of valuation allowance, recognized during the years ended December 31, 2023, 2024 and 2025 due to generation of advertising and market related expenses carryforwards amounting to RMB8,239,531, nil and nil, respectively.

The Group assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the ability to generate sufficient future taxable income within the carryforward periods provided for in the tax law based on the periods in which the temporary differences become deductible. When assessing the realization of deferred tax assets, the Group has considered possible sources of taxable income including (i) future reversals of existing taxable temporary differences, (ii) future taxable income exclusive of reversing temporary differences and carryforwards, including consideration of specific known trends of profits expected to be reflected within the industry, (iii) taxable income in prior carryback years and (iv) tax-planning strategies. On the basis of this evaluation, as of December 31, 2024 and 2025, a valuation allowance of RMB307,902,579 and RMB187,490,468 (US$26,810,780) was recorded respectively to reduce the deferred tax assets to the amount that is more likely than not to be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as the Group’s projections for growth.

In accordance with the EIT Law, dividends, which arise from profits of foreign invested enterprises (“FIEs”), are subject to a 10% withholding income tax. In addition, under tax treaty between the Chinese Mainland and Hong Kong, if the foreign investor is incorporated in Hong Kong and qualifies as the beneficial owner, the applicable withholding tax rate is reduced to 5%, if the investor holds at least 25% in the FIE. A deferred tax liability should be recognized for the undistributed profits of Chinese Mainland subsidiaries unless the Company has sufficient evidence to demonstrate that the undistributed dividends will be reinvested and the remittance of the dividends will be postponed indefinitely.

The Group constantly assesses its intent to reinvest the offshore earnings. As of December 31, 2024 and 2025, the Group does not intend to reinvest certain undistributed earnings of the FIEs that have been generated in the Chinese Mainland, while for the remainder of the undistributed earnings, the Group intended to indefinitely reinvest. The Group has recorded a deferred tax liability of RMB58,600,000 and RMB45,622,417 (US$6,523,919) as of December 31, 2024 and 2025, respectively, associated with the earnings that are not indefinitely reinvested. The Group paid withholding tax of RMB15,650,000 and RMB58,477,583 (US$8,362,183) on distributed earnings during the years ended December 31, 2024 and 2025, respectively.

Undistributed earnings of FIEs that are considered to be indefinitely invested amounted to RMB4,255,686,362 and RMB4,930,483,185 (US$705,049,718) as of December 31, 2024 and 2025, respectively. All undistributed earnings are still subject to certain taxes upon repatriation, primarily where withholding taxes apply. The related unrecognized deferred tax liabilities were RMB425,568,636 and RMB493,048,319 (US$70,504,972) at a 10% tax rate as of December 31, 2024 and 2025, respectively.

Unrecognized tax benefits

A roll-forward of unrecognized tax benefits is as follows:

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The accrued interest and penalties related to income taxes as of December 31, 2024 and 2025 is set forth below:

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As of December 31, 2023, 2024 and 2025, the Group’s unrecognized tax benefits consisted of: 1) RMB50,384,562, RMB107,202,546 and RMB180,110,598 (US$25,755,473) arising from charge-offs of loans receivable from Xiaoying Credit Loans and other loans and accounts receivable and contract asset; and 2) RMB314,482,367, RMB356,253,543 and RMB323,352,375 (US$46,238,775) arising from difference in timing for including certain taxable income in tax return; 3) nil, nil and RMB28,805,573 (US$4,119,142) arising from charge-offs of subrogation receivable related to the guarantee services.

As of December 31, 2023, 2024 and 2025, RMB102,814,895, RMB102,814,895 and RMB102,814,895 (US$14,702,334) of the unrecognized tax benefit balance, if recognized upon examination settlement or statute expiration, would affect the effective tax rate.

For the year ended December 31, 2023, 2024 and 2025, the increase of accrued interest and penalties related to income taxes was RMB2,126,378, RMB5,067,905, and RMB6,079,454 (US$869,350), respectively, which were recorded as part of the income tax expense in the consolidated financial statements.

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In February 2026, the Group was informally notified after a routine tax audit that certain suppliers’ operating entities may be considered not in compliance with tax practice, which may impact the eligibility of associated input VAT offsets as well as claims for tax deductions. The Group is currently in discussion with tax authorities to determine potential tax implication; however, the financial impact cannot be reasonably estimated at this time. Management concluded this matter represents a non-adjusting subsequent event under ASC 855, and no provision was recognized as of December 31, 2025.