In 2024, the Chinese government is facing a decline in the country’s tax revenues. The decrease of tax revenues not only leads to more frequent tax inspections but also escalates difficulties when companies across the country apply for various tax refunds. It is a common observation that the application process has become more intricate and time-consuming, for value added tax (VAT) credit refunds, corporate income tax (CIT), individual income tax (IIT) refunds, and so forth.

On 25 October 2024, the Ministry of Finance of the People’s Republic of China published the data for the nation’s fiscal balance for the first three quarters of 2024. According to the report, the general public budget revenue amounted to 163.06 trillion RMB, marking a 2% decrease compared to the previous year. Tax revenue, specifically, totaled 1,317.15 billion RMB, indicating a 5.3% drop from the previous year. The subsequent section presents an overview of the main tax items:

Except for the slight increase in import VAT and consumption tax, tax revenues from other major taxes exhibited a downward trend. Under the pressure of tax collection, it is unsurprising that the tax authorities in China tend to exercise more rigorous controls over tax refunds, particularly for companies applying for tax refunds of considerable amounts.

• During the review procedure, the tax authorities may request the companies to submit various supporting documents related to the tax refund matter or the company’s general financial situation. These could include the breakdowns of certain financial accounts, commercial contracts and invoices, bank transaction statements, etc.
• The understanding of tax rules is often different among different tax authorities. As each tax refund application must be approved by various level of tax officials, the outcome is with huge uncertainty, because the result made by one tax official could be rejected by the superior tax official.
• The time frame for the tax refund process has also lengthened considerably. What used to be a relatively quick procedure is now often protracted for an extended period. It is common for companies to undergo rounds of communication and negotiation with the tax authorities until an alignment can be reached.
• In some cases, if the tax authorities identify potential risks while reviewing the documents, the application for tax refunds may even trigger a comprehensive tax inspection.
• In certain areas, local tax authorities may not implement the tax rules precisely and strictly when they have enough tax revenues. However, in a situation that tax authorities have to chase tax revenues, they may change the interpretation of the tax rules which makes the tax refund more difficult, if not impossible.

The challenges associated with tax refunds have significantly contributed to the complexity and workload of the application process. For companies, this not only entails a financial cost in the form of cash flow but also disrupts their normal financial operations and poses potential risks to the company.

Given these circumstances, it is crucial for companies to adopt proactive tax planning that aligns with business development and financial forecasting, to maintain a stable tax performance. Ensuring the accuracy of tax declarations and payments from the outset is the best strategy. If a tax refund is necessary, a self-review can help prepare companies for potential hindrances in the refund process and minimize adverse effects.

In the current challenging economic climate, we suggest that companies should exercise caution when considering tax refund applications and always maintain a compliant tax position.

As one of the major indirect taxes in China, the value-added tax is closely related to the daily operations of companies. When companies purchased goods or services from their vendors, the total amount they paid included the price plus value-added tax. After a 44-year history, the second draft of value-added tax law amendment was released for public opinion in September 2023. Based on previous experience, the final version of the law may be issued in 2024 or 2025. In the following three chapters, we will provide you a glimpse of the history of value-added tax in China, current value-added tax policies in China, and some common issues related to value-added tax.

Chapter One: History of Value-added Tax in China

• Pilot phase (1979-1993)
  In July 1979, value-added tax was first piloted in Xiangfan, Hubei Province, and gradually piloted nationwide. Under the background of reform and opening up, China entered a new period of socialist modernization construction, and the role of taxation became important. In 1984, the State Council issued “Guo Fa [1984] No. 125” with six draft tax regulations, including the Regulations of the People’s Republic of China on Value-added Tax (Draft). The scope of value-added tax covered 12 categories of goods, such as machinery and equipment, vehicles and bicycles, steel and billets, etc. This marked that value-added tax had officially become a tax in China.
• Gradual establishment phase (1994-2003)
  In 1994, China reformed its tax structure and officially implemented tax sharing. It divided the revenues, expenditures, responsibilities and powers between the central and local governments. In the same year, the Regulations of the People’s Republic of China on Value-added Tax (“Decree No.134”) issued by the State Council came into effect on 1 January 1994. The Decree No.134 was more comprehensive than Guo Fa [1984] No.125 and expanded the scope of taxation. It raised the concept of small scale taxpayers and issued special invoices to improve the input tax credit system. However, the input tax on purchased fixed assets could not be deducted at that time because of the fixed assets investment inflation.
• Transformational reform phase (2004-2011)
  In 2004, the Ministry of Finance and the State Administration of Taxation submitted the value-added tax transformation reform plan, which changed the value-added tax base from production-based to consumption-based. The main difference between the two bases was whether or not the companies would be allowed to deduct the input tax on fixed assets. In 2008, because of the global financial crisis, the State Council issued the Regulations of the People’s Republic of China on Value-added Tax (Revised in 2008) (“Decree No.538”) in accordance with the plan to overcome the adverse impact of the global financial crisis.
• Business tax to value-added tax replacement phase (2012-2018)
  On 1 January 2012, Shanghai became the first city to launch a pilot project to replace business tax with value-added tax for transport and some modern service industries. This pilot project was extended to the whole country on 1 August 2013. The main purpose of the project is to reduce double taxation, which helps companies to reduce their tax burden. Finally, on 1 May 2016, the Ministry of Finance and the State Administration of Taxation issued Circular Cai Shui [2016] No.36 (“Circular No.36”) containing the Measures for the Implementing Rules for the Replacement of Business Tax with Value-added Tax. According to the Circular, all transactions of services, intangible assets and real estate will be included in the scope of value-added tax, and business tax will no longer be required. In 2017, the Regulations of the People’s Republic of China on Value-added Tax (Revised in 2017) consolidated the regulations in Circular No.36 and repealed Decree No.538.
• Legislation of value-added tax law phase (2019-now)
  In 2019, the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs jointly issued the Announcement [2019] No.39(“Circular No.39”) to promote a substantial reduction of value-added tax, which changed the tax rate from 16%, 10% and 6% to 13%, 9% and 6%. The system of refund of input value-added tax retained for credit was first established in Circular No.39.
  
  On 27 November 2019, the Ministry of Finance and the State Administration of Taxation issued an exposure draft of the value-added tax law for the collection of public opinions. In this draft, it added the regulations of deemed sales and non-taxable items, as well as some tax exemption regulations. The draft law was submitted to the State Council in 2020 and passed at the end of 2022. After the draft law was passed by the 13^th National People’s Congress, it was opened for public opinion for 30 days. The second draft of the amendment to the value-added tax law was released in September 2023.

Chapter Two: Current Value-added Tax Policies in China

Currently, the value-added tax law is still in the legislation process, the Regulations of the People’s Republic of China on Value-added Tax (Revised in 2017) is the main regulation on value-added tax on goods, and Circular No.36 is the main regulation on value-added tax on services.

I. Objects of value-added tax

After the replacement phase, transactions subject to value-added tax include sales of goods, services, intangible assets, real estate and imported goods within the Chinese territory.

II. Tax rates of value-added tax

The normal value-added tax rates for each category are summarized in the following table.

III. Taxpayers of value-added tax

Value-added taxpayers can be classified into General Value-added Taxpayers (“general taxpayers”) and Small Scale Value-added Taxpayers (“small taxpayers”). Different with general taxpayers, small taxpayers enjoy a simplified tax rate of 3% or 5%. With a lower tax rate, no input value-added tax is deductible for small taxpayers. In the second draft amendment, only the 3% rate applies to small taxpayer and the 5% rate is not mentioned.

The criteria for small taxpayers are clearly stated in the second amendment. Taxpayers whose annual taxable income is less than RMB 5,000,000 will be classified as small taxpayers, unless they have reliable accounting records.

IV. Invoice of value-added tax

The invoice of value-added tax can be divided into a special value-added tax invoice (“special invoice”) and a general value-added tax invoice (“general invoice”). A special invoice is required for taxpayers who need to credit input value-added tax to offset against output value-added tax. General taxpayers can issue a special invoice by themselves, while small taxpayers shall apply to the competent tax authorities.

V. Refund of value-added tax retained for credit

When taxpayers have more input value-added tax than output value-added tax, the excess input value-added tax will be carried forward to the next tax period. Starting with Circular No.39 on 1 April 2019, general taxpayers who have retained input value-added tax can apply for a refund if they meet the criteria of the tax authorities. This policy provides taxpayers with more flexibility in their cash flow.

VI. Value-added tax exemption

Sales of certain goods and services specified in the tax regulations may be exempt from value-added tax. According to the Regulations of the People’s Republic of China on Value-added Tax (Revised in 2017) and Circular No.36, the scope of tax exemption includes seven goods and forty services. In the second draft amendment, this scope is summarized into nine categories:

• Agricultural products and related services for plants and livestock.
• Prophylactic drugs and devices; medical services provided by medical institutions.
• Sales of antique books; sales of products that are used by the sellers themselves.
• Imported instruments and equipment directly used for scientific research, scientific experiments and teaching.
• Imported materials and equipment provided by foreign government or international institution for gratis aid.
• Products for the disabled; services provided by the disabled.
• Nursing services provided by nurseries, kindergartens, elderly service institutions, and disabled welfare institutions; matchmaking services; funeral services.
• Education services provided by schools; services provided by students under the work-study programs.
• Admission fees for cultural services provided by memorial halls, museums, cultural centers, cultural relics protection administrations, art galleries, exhibition halls, academies of painting and calligraphy, and libraries; admission fees for cultural and religious activities.

VII. Value-added tax refund for export sales

The tax rate for exported goods and services is zero. Certain exports of goods and services may be eligible for a value-added tax refund from the tax authorities. Enterprises shall register with the competent tax authorities and apply for the refund when the export transactions have actually happened.

The criteria of exported goods are the goods physically left the territory of China with a declaration and the export sale has been recorded in the accounting book, while the criteria of exported services are the services provided to foreign entities for complete consumption outside the territory of China within the scope includes research and development services, energy performance contracting services, design services, production and distribution services for radio, film and television programs, software services, circuit design and testing services, information system services, business process management services, offshore services outsourcing business, and technology transfer.

Different types of companies have different calculation methods. For manufacturing companies, the calculation method is “exemption, credit and refund”, which means that the export value-added tax is exempted, the input value-added tax can be credited against the tax payable and the excess part of the input value-added tax can be refunded. Meanwhile, for trading companies, the calculation method is “exemption and refund”, which calculates the refundable value-added tax with the purchase amount and refund rate.

VIII. Super deduction

Currently, there are three super deduction policies which are valid until 31 December 2027. The relevant industries and the super deduction rate are summarized in the following table.

In the second draft amendment, dedicated preferential policies will be implemented to support the development of small taxpayers, micro-enterprises and key industries, and to promote entrepreneurship and employment in the future.

Chapter Three: Common issues related to Value-added Tax

Situation One: A foreign company purchases a machine for its Chinese factory

A German company has a factory in China for assembling the components into final products. Because of the high transport costs from Germany to China, the German company signed a contract with a Chinese company to purchase the necessary equipment for the assembly and asked the Chinese company to transport the equipment to its factory in China.

According to the criteria mentioned in chapter two, the tax rate for exported goods is zero if the goods have physically left the territory of China with a declaration. In this situation, the equipment does not physically leave the territory of China, so the Chinese company cannot declare the equipment to customs and enjoy a zero tax rate.

Situation Two: Chinese company provides non-exempt services to foreign company

A German company wants to know the Chinese tax regulations regarding Research and Development Super Deduction (“R&D Super Deduction”) and High and New Technology Enterprise (“HNTE”). The German company finds a Chinese consulting firm to help it understand the criteria of R&D Super Deduction and HNTE. The consulting fee charged by the Chinese consulting firm includes the price plus the value-added tax.

According to the criteria for exported services, consulting services do not fall within the scope of exported services that can enjoy a zero tax rate. Therefore, this service is subject to value-added tax at the rate of 6%.

Situation Three: Foreign company providing services to Chinese company is subject to value-added tax

A German company providing intercompany services to its Chinese subsidiary is subject to value-added tax. For example, a German company helps its Chinese subsidiary to maintain the data system and provide online support for the system. The Chinese subsidiary pays the German company a monthly fee for the services.

According to Circular No.36, either the seller or the buyer of the service is located in China, the income from the services is subject to value-added tax. In this situation, the Chinese subsidiary shall act as a withholding agent to withhold 6% tax on behalf of the German company.

Our Recommendations

As value-added tax is the most important tax related to the company’s daily operations, we recommend companies to continuously focus on the legislative status of the value-added tax law, understand the changes and plan in advance. To analyze the future trend of the value-added tax law, companies may not only focus on the background of the current market, but also focus on the history of the value-added tax regulations. To help companies understand the new law correctly, we will continue to monitor the status of the amendment of value-added tax law and will provide relevant updates in due course.

On 26 April 2024, the Standing Committee of the National People’s Congress passes the Law of the People’s Republic of China on Customs Duties (“Customs Duty Law”), with which China has enacted laws for 13 out of 18 tax types. The new Customs Duty Law will come into effect on 1 December 2024.

Prior to the legislation of the Customs Duty Law, the Regulations of the People’s Republic of China on Import and Export Duties (Revised in 2017) (“Customs Duty Regulations”)is the main regulation on customs duties. The new Customs Duty Law is not an amendment to the revised Customs Duty Regulations, it raises some practical provisions from relevant announcements and regulations to the law and makes the law more comprehensive. In the following article, we will provide you with some key changes under the new Customs Duty Law.

• Clarification that the CBEC platform, logistics enterprises and customs declaration enterprises are withholding agents of customs duties

With the development of cross-border e-commerce (“CBEC”), the new Customs Duty Law clarifies the obligation of parties involved in CBEC transactions. According to Article 3, e-commerce platform operators involved in CBEC retail importation, logistics enterprises and customs declaration enterprises are obliged to withhold or collect customs duties on behalf of the consumers.

• Taxpayers will be able to consolidate their tax payments

In Article 43, the provisions for consolidated payment of customs duties for taxpayers who meet the requirements and provide a guarantee to the customs authorities are incorporated into the law. Compared to the previous model, which required taxpayers to make a payment for each importation, the consolidated payment module is more convenient for taxpayers.

• The duration of tax refund has been extended to three years

Article 51 grants an extension of the refund period when taxpayers find that they have overpaid customs duties. Prior to the new Customs Duty Law, the refund period for overpayments was one year, and the new Customs Duty Law extends this period to three years. The purpose of this extension is to protect the legitimate rights and interests of taxpayers.

• The period for Customs to confirm the amount of duty payable has been extended to three years

The period for Customs to review the amount of duty payables has also been extended from one year to three years. If Customs finds that taxpayers have paid less customs duties than they should have, they may require taxpayers to pay the customs duties and any overdue payment within three years.

• Taxpayers with unpaid tax payments will be restricted from leaving the country

Article 49 states that Customs may restrict taxpayers or their legal representatives from leaving the country if they fail to pay the full amount of customs duties or overdue payments without providing a guarantee to Customs. This is a new administration regulation that was neither covered in the Customs Duty Regulations nor in the Customs Law.

• Customs’ enforcement measures for unpaid taxes

To protect the rights and interests of the country, the new Customs Duty Law provides Customs enforcement measures to collect the unpaid tax payments, including unpaid customs duties and overdue payments. In Article 50, the law states that if taxpayer refuses to pay without reasonable explanation, the Customs may, upon approval, notify the banking financial institution to transfer the amount from the taxpayer’s deposit or remittance, or seize the goods or other property of taxpayer.

The new Customs Duty Law will come into effect from 1 December 2024, so there is still time for companies to study for the new regulations during this period. Since the new Customs Duty Law aims to protect the interests of the country and taxpayers and to promote the foreign trade, we recommend that companies involved in international trade carefully review the regulations and prepare for the upcoming Customs Duty Law in advance.

In the context of encouraging offshore trade, a new preferential treatment of stamp duty has been issued for enterprises registered in Shanghai Pilot Free Trade Zone and Lingang New Area. At the end of last year, the tax authority also announced the extension of some existing tax benefits.

I. Stamp duty exemption policies on offshore trade in Shanghai Pilot Free Trade Zone and Lingang New Area

In February 2024, the MOF and the STA issued the tax circular Cai Shui [2024] No. 8 to support the development of offshore trade in pilot free trade zones. According to the new preferential policy, the stamp duty is exempted for offshore trade contracts if the taxpayers that carry out the offshore trade are registered in Shanghai Pilot Free Trade Zone and Lingang New Area.

The offshore trade refers to a resident enterprise purchasing goods from a non-resident and reselling them to another non-resident enterprise. The goods do not physically enter or exit the customs territory of China. This policy will be in effect from 1 April 2024 to 31 March 2025.

II. Continued implementation of land appreciation tax preferential treatment in the context of enterprise system reform and restructuring

According to the Announcement [2023] No. 51 issued by the Ministry of Finance (“MOF”) and the State Taxation Administration (“STA”), land appreciation tax exemption policies for enterprises that change the system and conduct restructuring are extended to 31 December 2027.

The extension policies basically keep the key points of the original policies as stipulated in Announcement [2021] No. 21 issued by the MOF and the STA. Companies qualified for land appreciation tax exemption are limited to these that carry on enterprise reform including overall enterprise system reform, enterprise merger, enterprise split and real estate investment as equity. The preferential policy is not applicable if one of the enterprises involved is a real estate development enterprise.

III. Continued exemption of consumption tax on oil products regenerated from waste mineral oil

In September 2023, the MOF and the STA issued the Announcement [2023] No. 69 to continue the exemption of consumption tax on the industrial oil produced with recycled waste mineral oil until 31 December 2027.

To be exempted from consumption tax, all of the following conditions shall be met:

• Enterprise shall obtain the permit for (Comprehensive) Operation of Hazardous Wastes issued by the authority of ecology and environment.
• The raw material shall consist of at least 90% of waste mineral oil.
• Finished products must include lubricating base oil, and the lubricating base oil produced with each ton of waste mineral oil shall not be less than 0.65 tons.
• Products made with waste mineral oil shall be accounted separately from products made with other raw materials.

This policy is proposed to support and promote the comprehensive utilization of resources and environmental protection.

On 29 December 2023, the Shanghai Municipal Tax Service enacted the Administrative Measures of Shanghai Municipal Tax Service on Advance Tax Rulings (for Trial Implementation) (hereinafter referred to as “the Measures”). The Measures provide taxpayers with written rulings for specific complex tax-related matters that are expected to occur in the future. This will increase the certainty of applying tax policies, reducing tax risks, and avoiding negative consequences.

I. Target of Advance Tax Rulings

According to the Measures, “Advance Tax Rulings” are services provided by tax authorities and the service results are delivered in form of a written confirmation. From a legal point of view, the advance tax rulings are not subject to the rules of administrative reconsideration and administrative procedures.

II. Scope of Advance Tax Rulings

The Measure is only applicable to taxpayers registered in Shanghai. The scope includes specific complex matters expected to occur in the future.

However, any of the following matters do not fall within the scope of advance tax rulings:

1. Matters that do not have a specific project plan or will not occur within the next two years.
2. Matters without a reasonable commercial purpose or those that are definitely prohibited by the relevant laws and regulations of the State.
3. Matters that are already covered by existing laws and regulations.
4. Other matters to which advance tax rulings are not applicable.

III. Application process for Advance Tax Rulings

Taxpayers applied for Advance Tax Rulings shall submit an application to the competent tax authority presenting the transactional arrangements, tax position, impact on operations and tax consequences etc. Tax authority will communicate the application with taxpayers. After conducting necessary review and investigation, tax authorities will issue a ruling stating the opinion from tax authority. After issuing the advance tax ruling, tax authorities could perform follow-up review.

The Opinion on Advance Tax Rulings shall only apply to the matters specified in the Application Form for Advance Tax Rulings. It cannot be applied directly to other taxpayers or similar matters.

If the transactional arrangements have substantial change or the tax rules are changed, the advance tax ruling shall be revoked by tax authority. However, taxpayers could notify tax authorities within 30 days and apply for advance tax rulings again.

IV. Our observations

In the background that tax authorities tend to adopt procedures such as “record filing” or “self-assessment tax filing and documents maintenance” in China, taxpayers have to bear certain tax risks, in particular for complex transactions or being in a situation that the tax rules are not clear enough.

In practice, taxpayers usually consult the tax authority on no-name basis to ensure that they are complying with the tax rules. But after completing the tax filings, they may still face the risk of receiving an announcement of adjustment from the tax authority, which may result in make-up of taxes and overdue interest. With the advance tax ruling, more certainties are granted to the enterprises which may assist the management of enterprises in making business decisions.

For example, an overseas group has a restructuring project involving subsidiaries in China and overseas. Due to the complexity of the transaction, it may be difficult for the overseas group to determine the tax obligations in China. In this situation, the Chinese subsidiary may submit an application to the competent tax authority before the implementation of the restructuring and require an advance ruling. With the advance riling, the uncertainty of the tax exposures would be largely eliminated.

The Trial Implementation of Advance Tax Rulings is an effort made by the Chinese tax authorities for the first time. Even though the Advance Tax Ruling is released by Shanghai tax authority, it is still an important step in the Chinese tax administration.

In Q4 2023, the transition to e-invoicing system has been further developed in China and some amendments to the existing tax laws were published by the National People’s Congress for collection of public opinions. In Hong Kong, the Legislative Council passed two bills regarding the stamp duty rate reduction and the taxation on foreign-sourced disposal gains respectively.

I. Transition to E-invoicing System in the last eight provinces in China

The fully digitalized e-invoicing system has been rolled out nationwide in Q3 2023. In Q4 2023, with the last eight provinces announcing to launch the fully digitized electronic invoices, the e-invoicing system has covered all provinces/regions in China.

The e-invoicing progress in last eight provinces are summarized as follows:

II. Extension of VAT exemption policy for interest-free intercompany loans

In September 2023, the Ministry of Finance (“MOF”) and the State Taxation Administration (“STA”) issued the Circular [2023] No. 68, which extends the effective period of VAT exemption policy for interest-free intercompany loans between intergroup enterprises to the end of 2027. Before the extension, the preferential VAT treatment were supposed to be ended at 31 December 2023.

III. New legislation progress of Mainland China

1. VAT Law (draft for collection of public opinion)

On 1 September 2023, the National People’s Congress (“NPC”) issued the Second Draft of the amendment to the PRC Value Added Tax Law for collection of public opinions. Compared to the first draft, the main changes in this version are as follows:

• The standards for small-scale taxpayers are clearly stated, with taxable income not exceeding five million RMB.
• When the revenue of a taxpayer is significantly high or low without proper reasons, the tax authorities should use refer to the relevant clauses in the “Administrative Law of the People’s Republic of China on the Levying and Collection of Taxes” to determine the revenue of the taxpayer.
• If the input VAT exceeds the output VAT, taxpayers opt to carry forward the excess to the next period or claim a tax refund.
• Remove the rule that the simplified tax calculation method cannot be changed within the prescribed period once chosen by the taxpayer.
• Clearly state the situations that are eligible for dedicated preferential policies. For instance, supporting the development of small and micro-enterprises, key industries, as well as promoting entrepreneurship and employment.
• The tax payment obligation arises on the date on which the transaction deemed as taxable is completed.

2. Amendments to the Implementation Regulations for Invoice Administration

On 20 July 2023, the State Council announced to revise the Implementation Regulations for Invoice Administration for the third time. In accordance with the “Decision of the State Council on Revising and Repealing Some Administrative Regulations”, the main changes compared with the 2019 version are as follows:

• Add a regulation stipulating that hard copy invoices and electronic invoices shall have the same legal effect.
• No permits are required for vendors of invoices. Instead, tax authorities shall determine the vendor of invoices following the relevant provisions on government procurement procedures.
• When determining the types, quantity of invoices and method of collection, the tax authorities consider the risk level. Entities or individuals are not required to present the invoice purchase register to the tax authorities when collecting invoices.
• For prohibit acts regarding invoice administration, the following actions have been added: stealing, intercepting, tampering with, selling or disclosing invoice data.
• Verification of the tax agent’s identity is required when issuing an invoice.

3. New Administrative Dispute Resolution Law

On 1 September 2023, the Administrative Dispute Resolution Law of the People’s Republic of China was amended and passed at the 5^th Session of the Standing Committee of the 14^th National People’s Congress. Compared with the previous draft, the main changes of the new law are as follows:

• Departments with different functions and levels are clearly differentiated to assist applicants in identifying the appropriate department to apply to.
• The scope of administrative dispute resolution is expanded to include additional situations such as decisions on compensation and work-related injuries, unlawful actions by administrative organizations, and violations of legal rights in the disclosure of government information.
• Applicants may authorize one or two lawyers or a legal aid agent to participate in the administrative consideration and to submit their applications online. If the application documents are incomplete, the administrative organ shall notify the applicant in writing within five (5) days, listing the items that need to be corrected once and for all.
• A new chapter is added to regulate the procedures for the administrative dispute resolution hearing. This chapter outlines the standards for suspending and terminating administrative dispute resolution, as well as the practical requirements for administrative dispute resolution hearing cases.
• The decision process for administrative dispute resolution is optimized. The standard for changing, cancelling and confirming administrative dispute resolution decisions has been clarified and additional rules for the respondent have been added to strengthen the enforcement of administrative dispute resolution decisions.

IV. HK Stamp Duty Rate Reduction

On 15 November 2023, the Stamp Duty (Amendment) (Stock Transfers) Bill 2023 was passed by the Legislative Council of Hong Kong. According to the amendment, the rate of stamp duty on stock transfers is reduced from 0.13% to 0.1%, which came into effect on 17 November 2023.

The stamp duty rate reduction is aimed to lower investors’ transaction costs, improve market sentiment, and enhance the competitiveness of Hong Kong’s stock market.

V. HK IRD’s New Bill for Taxation on Foreign-sourced Disposal Gains

On 29 November 2023, the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Bill 2023 was passed by the Legislative Council of Hong Kong. The Bill seeks to refine Hong Kong’s foreign-sourced income exemption (FSIE) regime by expanding the scope of assets in relation to foreign-sourced disposal gains to cover all assets other than shares or equity interests. The refined FSIE regime will come into effect on 1 January 2024.

Under the existing FSIE regime of Hong Kong, multinational enterprises (MNEs) are not required to have adequate economic substance in Hong Kong to enjoy tax exemption for their offshore passive income. According to the latest requirements of the Guidance on FSIE regime updated by the EU in December 2022, all types of passive income (including dividends, interests, royalties and capital gains) shall be subject to the economic substance test. So Hong Kong was landed on the European Union’s (EU) “watch-list” of markets with risks of double non-taxation.

Under the refined FSIE regime of Hong Kong, the scope of assets in relation to foreign-sourced disposal gains is expanded, which brings Hong Kong’s FSIE regime in line with the updated Guidance on FSIE regime of the EU. With the introduction of the new Bill, Hong Kong Government requests the EU to swiftly remove Hong Kong from the EU watch-list in order to benefit local MNEs in Hong Kong. 

We suggest that MNEs entities in Hong Kong closely monitoring the on-going development of the FSIE regime and assessing the potential tax impact accordingly.

In Q3 2023, the State Taxation Administration (“STA”) of China together with relevant authorities announced several new preferential tax policies and granted further grace period for certain existing ones, in a move to revive the economic growth and boost market confidence in China.

I. Extended preferential tax policies

From the Individual Income Tax (“IIT”) perspective, the following preferential policies regarding tax-exempt fringe benefits for expatriates, annual bonuses and stock options are extended until the end of 2027. See our earlier article for more information — Tax Alert: China’s IIT Preferential Policy for Expatriates Extended.

In terms of Corporate Income Tax (“CIT”), Value-added Tax (“VAT”) and local surcharges, the following tax incentives are also extended until the end of 2027.

II. Increased amount of certain IIT itemized deductions for resident individuals

Itemized deductions for personal living expenses for resident individuals were introduced in the 2019 IIT Reform to align with the international tax practice.  Expatriates who stay in China for at least 183 days within a tax assessment year can choose to claim itemized deductions that are also applicable to Chinese residents, or the traditional tax exemption on eight categories of fringe benefits available to expatriates only. Once elected, the IIT treatment cannot be changed by the expatriate during the tax year.

In Q3 2023, several itemized deductions (also referred to as “special additional deductions”) for IIT purposes are further increased per Guo Fa [2023] No. 13 as follows:

Expatriates working in China can compare the above itemized deductions with the tax exemption of fringe benefits specifically applicable to expatriates, make their choice at the beginning of the year and notify the employer accordingly. It is said that the latter policy for expatriates will be gradually replaced by the former itemized deductions and the transition period has recently been extended to the end of 2027 as stated in Section I.

Based on our observation, the tax exemption of fringe benefits applicable to expatriates only still appears to be more favorable in most cases, provided it is well planned and supported by proper documents, e.g. invoices (fapiao). Our professional team composed of HR & Payroll experts can provide advisory or compliance services in this regard upon your request.

III. Nationwide transition from paper-based invoicing system to E-invoicing system

As the STA pushes ahead with the Taxation Digitalization, the fully digitalized e-invoicing system was initially piloted in several cities in September 2020 and has been fully rolled out nationwide this year.

Under the new digitalized e-invoicing system, taxpayers can issue, submit and verify fully digitalized e-fapiao with QR codes online via the unified e-invoicing service platform. There is no need for cumbersome tax invoice control devices. Prior to the transition, taxpayers are required to revoke all existing paper or electronic blank invoices.

Please note that the digitalized e-fapiao is required to be archived in XML format according to Cai Kuai Bian Han [2023] No. 18 issued by Ministry of Finance, for at least 10 years as required by the prevailing tax laws.  Hence, the data management would play an essential role in the day-to-day tax management of enterprises in China going forward.

Meanwhile, the Golden Tax System (“GTS”) Phase IV is under construction and is expected to be implemented next year. We will keep you in tune for the further progress of Taxation Digitalization in China.

IV. Draft amendment of Company Law open for public opinion containing capital contribution requirement

On September 1, 2023, the National People’s Congress (“NPC”) issued Third Draft of the amendment to the Company Law of the People’s Republic of China (“Third Draft Amendment”) open for public comment. Compared to the earlier version, the main changes are as follows:

• Companies would be required to pay up the registered capital in full within 5 years of incorporation. (At present, investors can choose to subscribe the registered capital for 20, 30 or even 50 years, depending on the expected span of operation.) It is uncertain whether any transitional arrangements will be introduced.
• The founding shareholder would be jointly and severally liable for any significant underpayment of the capital contribution. 
• The legal representative would have to be either a director or a manager of the company.
• Shareholders can engage external firms to exercise their right to inspect the company’s financial and legal documents.
• The convening and resolution making of shareholders’ meeting and board meeting may be carried out by means of online correspondence, unless otherwise provided under the Articles of Association (“AoA”).

We will continue to monitor the developments with respect to the amendment of the Company Law and will provide relevant updates in due course.

Do you have questions?

For any questions about accounting, tax and regulatory matters in China, please do not hesitate to reach out to us.

For small-scale and low profits enterprises in China, a lot of tax relief policies have been released by
the Chinese tax authorities in recent years.

Overview

The following table summarizes the current corporate income tax (“CIT”) policies for small-scale and low profits enterprises:

Explanation and impact

We can see from the table that the tax incentive policy on the taxable income no higher than CNY 1 million has expired as of 31 December 2022. Currently, the State Taxation Administration has not an-nounced the renew policy yet. If this policy is not extended, the CIT shall be calculated at 20% for tax-able income no higher than CNY 1 million from January 2023.

However, the existing incentive tax policy for taxable income between CNY 1 million and CNY 3 million remains valid until the end of 2024. According to the ability-to-pay principle of taxation, generally the effective tax rate for taxable income of CNY 0-1 million shall not be higher than that for taxable inco-me of CNY 1-3 million. So we expect that the tax incentive policy will likely continue for taxable income no higher than CNY 1 million or change to the same policy for taxable income of CNY 1-3 million.

With the first quarter of 2023 coming to an end soon, it is time to file the provisional CIT return for Q1 in China. We advise small-scale and low profits enterprises in China to keep a close eye on policy changes in the near future. We will also update the policies once the new policies are announced.

On 5th March 2019, the Premier of China released a government work report at the 13th National People’s Congress and announced further tax reductions. In terms of VAT, tax rates shall be reduced. The reduction scope is as follows:

Taxable transaction	Applicable VAT rate
	Before	After
Sales and importation of general goods; provision of processing, repair and replacement services; and provision of leasing services of tangible and moveable assets	16%	13%
Sales and importation of specified goods; provision of transportation, postal, basic telecom services, construction services and leasing services of immoveable property; and sales of land use rights or immovable property	10%	9%
Provision of value-added telecom services, financial services, modern services and lifestyle services; and sales of intangible assets other than land use rights	6%	6%

We will keep you updated once further information has been released.The enforcement time of the VAT reduction is not yet determined. We expect that the State Administration of Taxation will issue a regulation after the National Congress and release more details in this aspect.