The long-awaited authoritative clarification on VAT treatment of reinsurance in China has been announced.
On 18 June 2016, the Ministry of Finance (MOF) and the State
Administration of Taxation jointly issued Circular Caishui 
68 (Circular 68) which provides a supplementary explanation on the
reinsurance arrangement under the VAT Regime. The Circular has a
retrospective effect, backdated to 1 May 2016.
Circular 68: two scenarios of VAT treatment on reinsurance
Firstly, VAT is exempt when an insurance company which is
established within mainland China provides reinsurance services to
another insurance company established outside of mainland China,
and the service is completely consumed outside of mainland China.
Secondly, VAT registers which provide reinsurance services within
mainland China shall follow the VAT rules that are imposed on the
underlying insurance policies. Where a reinsurance contract covers
several different insurance contracts and all the underlying
insurance contracts are VAT-exempt contracts, the reinsurance
contract is immediately VAT-exempt. Otherwise, the reinsurance
contract is subject to VAT.
The first scenario proves an alignment with the Circular 38 that
sets out the rules of VAT, where cross-border transactions apply
the rules of zero VAT or VAT exemption. For example, insurances
covering risks arising out of export transactions including export
goods insurance and export credit insurance are VAT-exempt. In the
first scenario reinsurance is exported and it is therefore exempted
from VAT. The second scenario gives a very specific case of VAT
treatment on in-country reinsurance. When the underlying insurance
contract is subject to VAT so is the reinsurance contract; it means
when an underlying insurance contract is VAT-exempt, the
reinsurance contract follows suit. Currently the following
insurances are VAT-exempt:
agriculture and livestock
term life insurance that exceeds a
period of one year
term health insurance that exceeds a
period of one year
term pension annuity insurance that
exceeds a period of one year
insurance covering export risks
export credit insurance
Scenarios that are not specified in Circular 68
VAT treatment on reinsurance where the premium is ceded from
mainland China abroad, is not specified in Circular 68.
Nevertheless, for a long time there has been a withholding rule
under the business tax regime applying on the out-going premium.
The rule is not changed despite the introduction of VAT which is
outlined in a general term in Circular 38; that overseas
reinsurance companies are subject to the VAT at a withholding
basis, where the China-based reinsured should deduct the VAT from
the ceding premium abroad. This VAT amount can be considered as
input tax credit to be set-off the output tax after the withholding
process is completed and a certificate is obtained.
It is not clear what VAT treatment should apply where an
in-country reinsurance policy which covers both taxable insurance
policies and VAT-exempt insurance policies. But, given the current
practices we observe, this scenario of combination happens very
How can IPT Quote help?
IPT Quote, TMF Group's online tax calculation tool, will
display the withholding rate for cross-border reinsurance where the
premium is ceded from China abroad. Two subclasses will need to be
configured for the in-country reinsurance line where the different
treatment between the taxable insurance premium and VAT-exempt
premium will be manifested.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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