In 2010, China’s unified tax system mandated foreign enterprises and foreign-invested enterprises (FIEs) to pay for urban construction and maintenance taxes. These are indirect taxes that were not previously charged to foreign individuals or FIEs. Prompted by its inclusion in the World Trade Organization in 2008, China has continued to enact laws leading to tax unification. Thus, these changes would have affected foreign individuals and businesses involved in value-added tax (VAT) payments.
Read our previous article on China’s New Legislation for VAT and Consumption Tax
China’s transition to a single unified VAT system has led to various changes in the treatment of indirect taxes including the urban construction and maintenance tax.
What is Urban Construction and Maintenance Tax?
The urban construction and maintenance taxes are payable tax rates on the amount of indirect taxes such as VAT and consumption tax. They are normally charged at different rates depending on the location of the taxpayer.
- City (7%)
- County or town (5%)
- Other areas (1%)
Such surtaxes are tax liabilities of VAT payers in China. Moreover, the collection of these surcharges aims to help fund the projects of local communities. Therefore, these taxes are based on the location of the taxpayer and are collected at the local level. Accordingly, local governments are also responsible for determining these taxes and implementing related policies.
New urban construction and maintenance law
On August 11, 2020, the State Taxation Administration released a notice regarding the new law on urban construction and maintenance taxes. Article 3 of the new law states that urban construction and maintenance taxes will not be levied to:
Overseas entities or individuals who pay VAT and consumption tax for the imported goods or labor services or intangible assets. This applies to such imports sold within China territory.
Furthermore, the amount of the said surcharges is calculated by multiplying the tax base (VAT and consumption tax) by the applicable rates as mentioned above.
On the other hand, the new legislation dictates that the State Council may reduce or exempt urban construction and maintenance taxes. This condition applies in relation to the construction of major public infrastructure, special industries, or response to national emergencies.
The said provisions will take effect from September 1, 2021. To note, it will repeal the old law on urban construction and maintenance tax of 1985.