Hong Kong: The Completion Of VAT Reform Program

On 26 October 2011, the Chinese State Council officially announced the launching of a pilot Value Added Tax ("VAT") reform program ("Pilot Program") to be carried out in three phases. In phase 1, the initial trial (effective 1st January 2012) was applicable to transportation industry and certain modern services industries ("Pilot Industries") in Shanghai. In phase 2, the Pilot Program was further rolled out to other regions for the Pilot Industries during the years of 2012 and 2013. The VAT Reform Program now reaches its final stage under which full VAT reform will be rolled out nationwide for all service industries.

On 24 March 2016, China's Ministry of Finance ("MOF") and State Administration of Taxation ("SAT") jointly issued Circular Caishui [2016] 36 (Circular 36) announcing the nationwide rollout of the VAT reform program, which sets out the final implementation rules applicable to all service industries, including expansion of China's VAT system to several sectors such as real estate, construction, financial services and lifestyle services, which will take effect from 1 May 2016.

In this Tax Flash, we aim to provide you with a summary of the major issues covered by Circular 36.


Classes of VAT Payers

There are two classes of VAT Payers:

  • "General VAT Payers" – Enterprises engaged in the service industries with annual turnover of RMB 5 million or above; and
  • "Small Scale VAT Payers" – engaged in the service industries with annual turnover of less than RMB 5 million. Small Scale VAT Payers may voluntarily apply for General VAT Payer status if certain conditions are met.

Applicable VAT Rates

The applicable VAT rates for different classes of VAT Payers under the Reform Program are set out below:

Classes of Taxpayers Type of Services VAT Rate
General VAT Payers
  • Leasing of movable property
  • Transportation services
  • Construction services (*)
  • Real estate (*)
  • Transfer of intangible assets (*)
  • Sale of immovable properties (*)
  • Research &Development ("R&D") and technology services;
  • Information technology services;
  • Cultural and creative services;
  • Logistics auxiliary services
  • Authentication & consulting services
  • Financial services (*)
  • Lifestyle services (i.e. food & beverage, hospitality and other services) (*)
Small Scale VAT Payers
  • All services included in the VAT reform program

(*) Types of services newly included under Circular 36

VAT zero rating and VAT exemption

Pursuant to Circular 36, the provision of the following services will be eligible for VAT zero-rating:

  • Qualified international and air transportation services
  • Provision to overseas service recipient(s) the following services which are entirely consumed outside China :

    • R&D services
    • Design services
    • Production and distribution of broadcasted films and television programs
    • Software services
    • Design and testing of electric circuits
    • Information system services
    • Business process management services
    • Offshore outsourcing services

If the service provider is a General VAT Payer, "Exempt, Credit and Refund Method" or the "Exempt, Refund Method" should be applied. For small scale VAT Payers, the related services will be VAT exempted.

Circular 36 also stipulates that the provision of the following services will be VAT exempted, unless otherwise specified to apply zero VAT rate:

  • Engineering and exploration services with the related project or mineral resources located outside China
  • Overseas conferencing and exhibition services
  • Overseas storage services
  • Movable property leasing services for which the object of leasing is located outside China
  • Provision of broadcasting services outside China
  • Provision of cultural and sports services, education and medical services and travel services outside China
  • Provision of postal services, delivery services and insurance services for exported goods
  • International transportation services provided without using its carrier
  • Provision of financing and other financial services to overseas service recipient(s) unrelated to goods, intangible assets and immovable property located in China
  • Unlicensed international transportation services which do not qualify for VAT zero-rating
  • Provision to overseas service recipient(s) the following services and intangible assets which are entirely consumed outside China :

    • Telecommunication services
    • Intellectual property services
    • Logistics auxiliary services (except storage services)
    • Certification, authentication and consulting services
    • Professional technology services (e.g. meteorologic services, seismological services, marine meteorologic services, city planning, monitoring of environment and ecology)
    • Business auxiliary services
    • Advertising services where the advertisement shall be released outside China
    • Intangible assets

Cross-border services

The provision of following services would be considered as outside China and the revenue is not subject to VAT:

  • Services provided by an overseas enterprise/individual and entirely consumed outside China;
  • Intangible assets provided by an overseas enterprise/individual and entirely used outside China;
  • Movable property leased by an overseas enterprise/individual and this movable property is entirely used outside China.


Mixed and multiple sales

A transaction which involves both sale of goods and provision of services is considered as mixed sales. The applicable VAT rates for taxpayers who engage in mixed sales would be determined by the main business activities of the taxpayer. For taxpayers who are mainly engaged in the production, wholesaling and retailing of goods, the income derived from mixed sales will be subject to VAT rate applicable to sale of goods, i.e. 17% or 13%. For other taxpayers, the income derived from mixed sales will be subject to VAT rate applicable to specific types of services.

The taxpayers who are engaged in various types of activities which are subject to VAT, e.g. sale of goods, provision of services, sale or transfer of intangible assets and immovable property, they would be subject to the VAT rate applicable to the specific type of activities, provided that the price has been separately accounted for. If the price has not been separately accounted for, the highest VAT rate would be applied to the entire sales amount.

Net basis method

Certain service industries, e.g. finance leasing services, air transportation services, travel services, agency services, are allowed to deduct certain expenses from the sales amount and report the sales amount on a net basis for VAT purpose.

Input VAT credit for purchase of property

For properties purchased on or after 1 May 2016 which have been subject to VAT at 11%, and the purchaser is registered as a general VAT tax payer, the taxpayer can claim input VAT credit in its VAT return. The input VAT credit has to be spread over a 2-year period following the purchase, with 60% of the input VAT credit claimable in the first year, and the remaining 40% claimable in the second year.

No input VAT credit for lending services consumed

In general, enterprises which are registered as general VAT taxpayers will not be eligible to claim input VAT credits for interest expenses, or for fees and charges relating to loans.


a. Construction and real estate industry

Transitional relief

For properties whose construction commenced before 1 May 2016, or for properties which are held as at 1 May 2016 and are later sold or leased, the developers could apply the simplified VAT calculation method, under which VAT rate of 5% is imposed on the taxable amount.

Deemed input VAT credit for the purchase of land use rights

When the developers sell properties, they will be eligible to deduct from the sales proceeds the cost of acquiring land use rights from the local government authority in calculating their VAT liability. This calculation method is only applicable to developers which apply 11% VAT rate on its sales.

VAT exemption for sales of owner occupied or residential investment properties

The sales of residential properties held by individuals will be subject to a 5% simplified VAT rate if they are sold within 2 years of purchase, and exempt from VAT if sold 2 years or more after purchase (except for 'high-end' properties located in Beijing, Shanghai, Guangzhou and Shenzhen, where 5% simplified VAT method applies to the gain after 2 years).

b. Financial services industry

The major points applicable to financial services industry are as follows:-

  • 6% VAT will apply to major forms of income derived from financial services, including interest income on lending transactions, on general banking, asset management, securities and trust related services.
  • No transitional arrangement for financial services industry.
  • Input VAT on interest expenses, fees and charges directly related to loan services incurred by general VAT taxpayers will not be creditable.
  • Banks, financial companies, trusts, credit cooperatives are allowed to perform VAT filing on a quarterly basis.

c. Lifestyle services industry

The major points applicable to lifestyle services industry are as follows:-

  • Lifestyle service is a new type of service introduced in the VAT implementation rules. Lifestyle service includes "cultural and sports services, education and medical services, travel and entertainment, food and beverage, accommodation and citizens daily services".
  • "Citizens daily services" is a new category which includes activities such as home assistance services, wedding planning services, elderly care, funeral services, emergency services, beauty, hairdressing, massage and related spa services.
  • No transitional arrangement for lifestyle services industry. 6% VAT will apply to most of the lifestyle services.
  • Input VAT credits are only allowed for cultural and sports services, education and medical services as well as travel services.
  • No VAT input credit is allowed for food and beverage services, entertainment services and citizens daily services.

Food and beverage services

  • Food and beverage services only refer to the provision of food and beverage services to customers in a physical location. The food and beverage service operators which only offer take away or delivery services would be considered as engaging in the sale of food products, which is subject to VAT at 17% or 13%.
  • No input VAT credit is allowed for food and beverage services.

Accommodation services

  • Input VAT credit is allowed for hotel charges where an individual staying at the hotel for business purpose but not for personal consumption.

Travel services

  • Travel services are allowed to deduct certain expenses (e.g. accommodation charges, transportation charges, food and beverage costs, visa fees, entrance fees) from the sales amount and report the sales amount on a net basis for VAT purpose.


With the completion of VAT reform program, the growth and development of the service sector shall be enhanced as specialization through multi-level subcontracting would not suffer additional business tax burden and export of services shall enjoy zero-rated or exemption treatment. The implementation rules on VAT reform program will be effective from 1st May 2016, enterprises should now begin to prepare for new rules and requirements, as well as changes to their internal systems that may be necessary such as:-

  • Estimate the possible impact on the actual tax burden, especially in cases where the new VAT rates are higher than the current BT rates, e.g. financial services, construction services (for those enterprises not eligible for transitional arrangement);
  • Provide sufficient flexibility when drafting tax clauses in commercial contracts and seeking modifications to existing clauses where necessary and feasible;
  • Enterprises which conduct mixed or multiple sales should ensure that the price for each type of services are clearly accounted for;
  • Enterprises should make good use of the new type of input VAT credit, e.g. input VAT credit for purchase of property; and
  • Prepare for new rules and requirements, closely monitoring the development and issuance of the detailed rules and seeking clarification and confirmation from the authorities, where possible.

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 Mondaq.com.

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”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.