Made public on 17 June 2011 the "Cai Shui (2011) No.
48" dated 10 June 2011 (Circular 48) grants an exemption for
the payment of business tax - which is payable in accordance with
the "Provisional Rules on Business Tax of PRC promulgated by
State Counsel" (which came into effect on 1 January 2009)
(Business Tax) - and has alleviated a number of concerns in respect
of the treatment of cross-border equipment leasing agreements
entered into prior to 2009.
Confuciusly Confused; Provisional Regulations on Business Tax -
1 January 1994 to 31 December 2008
Under the old regulations issued on 1 January 1994 (Old
Regulations) a 'service' was taxable by the Chinese tax
authorities if it took place in China. However there was
uncertainty as to whether the payments under a leasing arrangement
(be it loan interest or lease rentals) by a Chinese lessee,
constituted a payment for services 'services' and was
therefore taxable. Helpfully the State Administration of Taxation
(SAT) issued, effective from 1 January 1997, circular Guo Shui Fa
(1997) No. 35 (Circular 35). Circular 35 clarified that loan
interest and lease rentals relating to tangible moveable assets
generated from within China, but paid to foreign companies, was
exempt from tax.
However, Guo Shui Fa (2006) No. 62 (Circular 62) issued by the
SAT in 2006, abolished, amongst other things, Circular 35.
Understandably the leasing community was concerned that, with the
abolition of the circular that had clarified the tax exemption, the
tax exemption itself was abolished. This took the tax position back
to the uncertainty that has existed pre 1997. This was only further
complicated by local tax authorities issuing different
interpretations of the tax position to Chinese lessees within their
The situation only seemed to deteriorate in 2008 when the
"new" Provisional Regulations on Business Tax became
effective on 1 January 2009. These regulations appeared to confirm
that foreign lenders and lessors would be taxed on cross border
lending or leasing if the borrower or lessee were located in
Due to the understandable response from the business community
to the "new regulations", the Ministry of Finance (MoF)
and the SAT quickly issued Cai Shui (2009) No. 112 (Circular 112)
in August 2009, which performed a U-turn on the tax position.
However it stated that the revenue derived by the lessor from the
Chinese lessee would be taxed in accordance with the Old
Regulations. It was of course the lack of clarity under the Old
Regulations which had started this 'circular' process in
the first place - Confucius apparently once said "it does not
matter how slowly you go, as long as you do not stop" -
however going slowly in a big circle of circulars, would appear to
be taking this philosophy a bit too literally.
Pre 2009 Lease Agreements
Issued jointly by the MoF and the SAT, Circular 48 states that
the Business Tax exemption applies to finance leases and operating
leases entered into from 1 January 2010 to the dates of expiry of
the agreements, and shall apply retrospectively to the revenues
derived by foreign lessors from Chinese lessees under agreements
entered into prior to 2009.
For an agreement to benefit from the Business Tax exemption it
must fulfil the following criteria:
The lease period must exceed 365 days.
The asset being leased must be an aircraft, ship, aircraft
engine, large-scale power generator, machinery, large scale
environmental protection equipment, large scale construction
project machinery, large scale petrochemical equipment, containers
and other equipment.
The annual average lease rentals cannot be less than RMB
500,000 (approximately US$78,000).
Any amendments to the agreement shall not include changes to
the asset being leased, the rental amounts received or the term of
the leasing. However the identity of the lessor may be
Payments under the lease must have already been remitted by the
Procedure for Business Tax Exemption
The Chinese lessee must submit the original lease agreement,
evidence of the payments under the lease agreement and any other
materials required by the relevant tax authority. Such a submission
is required to be made by 30 September 2011.
Whilst it is always advisable to seek local law and tax advice
in respect of the particular details concerning each transaction,
Circular 48 appears to confirm that leasing companies purchasing
assets currently on lease with Chinese lessees will not be subject
to Business Tax provided that the facility arrangements which is
the subject of such novation agreement complies with the
requirements set out above.
One Step Forward
Whilst Circular 48 has provided a brief window of clarity and
respite it remains to be seen whether the next circular takes the
Business Tax one step forward or two steps back.
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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The assessee had maintained separate books of account on SAP based ERP system.
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