China: Broad & Bright Tax Newsletter April 2016

Last Updated: 10 January 2017
Article by Jiang Hao

Completion of the VAT Reform's Expansion

The value-added tax ("VAT") reform has been around for several years for the purposes of transforming business tax ("BT") into VAT with respect to sales of services, intangibles, and real property, since the State Council decided to kick it off with a pilot program in Shanghai on October 26, 2011. The pilot program officially got started on January 1, 2012. The Chinese central government clearly pushed a gradual expansion of the VAT reform over the years.

On March 23, 2016, the Ministry of Finance ("MOF") and the State Administration of Taxation ("SAT") took the final step to complete such gradual expansion by jointly issuing Caishui [2016] No. 36 ("Circular 36"). Circular 36 contains several attachments with detailed new rules, including the Trial Implementation Rules (Attachment One), the Supplemental Guidelines (Attachment Two), the Transitional Rules (Attachment Three), and the Zero-Rate and Exemption Rules on Cross-Border Transactions (Attachment Four). Circular 36 will take effect on May 1, 2016.

End of Business Tax

Circular 36 effectively ends the application of BT to sales of services, intangibles, and real property. This latest and final expansion covers construction, real property, financial services, and consumer services, thus leaving no territory for BT. Consumer services include cultural services, sports, education, medical services, travel, entertainment, lodging, catering, and so on. In other words, Circular 36, which was released by the MOF and the SAT, is able to supersede both the VAT Interim Regulations and the BT Interim Regulations, which were promulgated by the State Council. From a purely legal standpoint, the legal validity of Circular 36 is at least questionable, especially because the State Council is technically a higher governmental body than the MOF and the SAT.

Scope of Application

VAT only applies to actual or deemed sales of services, intangibles, and real property within the Chinese territory. In particular, VAT will be triggered, if one of the following conditions is met:

(i) Real property leased or sold is located in China;

(ii) Natural resource, of which use right is sold, is located in China; or

(iii) Either a purchaser or a seller of services (excluding real property) and intangibles (excluding natural resource use right) is in China.

Deemed sales of services, intangibles, and real property occur, when one of the following transaction takes places:

(i) Entities or individuals perform free services to other entities or individuals, but for public interest or general public; or

(ii) Entities or individuals sell intangibles or real property to other entities or individuals without a consideration, but for public interest or general public.

On the other hand, VAT will not be triggered in the following circumstances:

(i) Services sold by foreign entities or individuals to domestic entities or individuals are solely performed outside of China;

(ii) Sold by foreign entities or individuals to domestic entities or individuals are solely used outside of China; or

(iii) Personal property leased by foreign entities or individuals to domestic entities or individuals is solely used outside of China.

Tax Rates

The VAT rates are as follows:

  1. 6%, by default;
  2. 11%, applicable to transportation, postal services, basic telecommunications, construction, lease of real property, sales of real property, and sales of land use right;
  3. 17%, applicable to lease of personal property;
  4. 0%, applicable to cross-border transactions engaged by domestic entities and individuals; and
  5. 3%, applicable to small scale VAT taxpayers.

Transitional Rules

Issuance of Circular 36 obviously creates huge transitional problems for both taxpayers and tax bureaus. First, to the extent that taxpayers were previously entitled to BT exemptions or benefits, Circular 36 largely continues such exemptions or benefits under the VAT system. Second, for services or projects entered into before May 1, 2016, Circular 36 selectively grants transitional treatment. For instance, sales of real property acquired or built by general taxpayers prior to April 30, 2016 are still subject to VAT at a 5% rate. Given a lack of uniformity of the transitional treatment, however, Circular 36's impact on each individual sector or industry is worth of in-depth review on the case-by-case basis.

Our Observations

Circular 36 is clearly a great leap in the right direction. The essence of Circular 36 is to complete a years-long progress in replacing BT by VAT. The overall effect of Circular 36 would likely reduce tax burden of taxpayers involved, though this is not necessarily true to each single taxpayer. Further, allowance of input credits is expected to boost various industries of services, especially cross-border services.

On the other hand, it is unfortunate that neither the National People's Congress nor the State Council directly step into to complete this final and full expansion of the VAT reform from a rule of law perspective. Besides, as Circular 36 fails to contain even one single example illustration, the rule-making capability of the MOF and the SAT once again appears to be limited and primitive at best.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions