China Releases New Business Tax Rule for Service Contracts

January 22, 2009 Posted by China Briefing Reading Time: < 1 minute

Jan. 22 – China’s State Administration of Tax (SAT) has passed a surprise amendment concerning the calculation of Business Tax (BT) effective January 1st. The new rule changes the BT levying principle and affects all overseas companies contracting labor and services to other companies or people based in China.

The former BT rule provides that as far as labor or other services are rendered within China, the service income shall be subject to BT. On the other hand, the amended BT rule refers to “the place where the service recipient or service provider is located.”

In other words, where either the service recipient or service provider is located in China, then BT will be imposed on the service income, regardless of where is the service is rendered.

As a consequence, the concept of determining the source of labour service income subject to BT has changed. This means that for cross border service contracts with work either conducted in China, or contracted to a business or person permanently based in China, business tax will now be applicable on these contracts.

Presently, there is no clear explanation from the SAT on issues such as the applicable tax treatment for services delivered, or for contracts signed in 2008 but with tax withholding and payment completed in 2009.

Without an additional tax circular to clarify the issues, the tax treatment of the new BT regulation will be up to the interpretation of the tax official.

Businesses involved with service contracts in or with Chinese companies are recommended to get professional tax advice on the impact of this adjustment and its cross border contractual implications.

Sabrina Zhang is the National Tax Partner for Dezan Shira & Associates in China. For assistance on other legal and tax concerns email tax@dezshira.com.