Value-added taxes (VAT) are withheld in China when an enterprise incurs expenses from receiving overseas services. On the other hand, there are specific cross-border services that may be exempted from tax following China’s taxation rules on the sale of services or intangible assets.
Learn more about VAT Exemption on Sales of Services to Foreign Countries
More commonly, enterprises in China are taxed for commissions, purchase of software, or use of advertising services from outside China. Learn more about the VAT policies concerning these items.
VAT on handling fees and commissions
The deduction limit for handling fees and commission incurred by an enterprise is 5 percent of the income amount confirmed in the service agreement or contract signed.
Enterprises cannot include the handling fees and commission into their expenses under commission on sales, performance commissions, rebates, entry fees, or other expenses.
For real estate development enterprises, handling fees and commissions fall under sales expenses paid to overseas institutions. The tax deductions are allowed where the sales expenses do not exceed 10 percent of the commissioned sales revenue. This means that the tax on handling fees and commissions will be deducted first on the profit before calculating the total revenue.
Commission on sales of services
Overseas entities or individuals that provide services to domestic entities or individuals may not subject to VAT. However, the sales of services, intangible assets, or tangible movable properties must be proven to be incurred entirely overseas. In this case, if the commission from the sales of these items is entirely incurred overseas, then there is no need to withhold VAT.
In short, the sales of services, intangible assets, or tangible movable properties that occur or are used completely outside China are not subject to VAT.
On the other hand, sales of services, intangible assets, or immovable properties within the territory of China refer to:
- The sellers or purchasers of the services (excluding the lease of immovable properties) or intangible assets (excluding the rights to use natural resources) are within the territory of China;
- The immovable properties sold or leased are within the territory of China;
- The natural resources whose use rights are sold are within the territory of China; or
- Other circumstances as prescribed by the Ministry of Finance and the State Administration of Taxation.
VAT on advertisements
Entities providing advertising services to enterprises in China must pay VAT through the receiving enterprises. Design services including advertisements are subject to a 6 percent withholding tax.
Overseas entities or individuals providing “advertising services” to enterprises in China are subject to taxable services.
“Advertising services means the business activities of publicizing clients’ commodities, operating service items, cultural and sports programs, announcements, statements, and other entrusted matters and providing relevant services in various forms, such as books, newspapers, magazines, broadcasting, television, movie, slide show, billboard, poster, showcase, neon light, lamp box, and Internet, etc., including advertising agency and the release, broadcasting, publicity, and exhibition, etc., of advertisements.”
The enterprise that purchases services from overseas entities can deduct the VAT input from the VAT output, provided that the enterprise is a registered VAT payer. The VAT amount will be indicated on the tax payment voucher or certificate obtained from the tax authority.
Have a look at our previous article on Understanding VAT Refund: Trade vs. Manufacturing
Consequently, taxpayers who wish to deduct the VAT input should present the following documents:
- Written contract;
- Payment voucher; and
- A statement or invoice from an overseas entity.
VAT on software purchase
Software products are also subject to VAT and refer to software products, information systems, and embedded software products. The VAT rate for the sales of software products is currently at 13 percent (originally at 17 percent). Enterprises that sell self-developed or localized imported software can apply for VAT refunds. Thus, according to the refund policy, they can refund the part of VAT in excess of 3 percent of their actual VAT burden upon collection.
On the other hand, if the enterprise owns or co-owns the software’s intellectual property right (IPR), there will be no VAT to be collected. Hence, only when an enterprise with no IPR over the software is entrusted to develop it can be charged with VAT. Moreover, the transfer of IP rights and the sale of software by the taxpayer shall also be deemed VAT-free.
If you need help with calculating and understanding your tax refund and liability involving software products, contact us for a consultation and assistance.
Issuing correct invoices for VAT-related services such as commission, advertising, and software purchase is vital to ensure tax compliance and avoid hefty penalties. Especially, tax authorities can deem the sales of services according to their discretion. It is best to consult with tax experts to ensure the proper application of China’s VAT policies before taking further action.
S.J. Grand’s tax and accountancy services can assist you in matters concerning your VAT payments and related incentives. Our local experts will assist you throughout the requirement and procedures. Contact us to get you started.
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