Aug 2022 - 0% VAT rate vs VAT exemption
When a Chinese entity provides services to an oversea legal entity, the services’ invoices given by the Chinese entity are subjected to the Chinese VAT. In a specific situation, the Chinese entity may apply for VAT Exemption or 0% VAT rate.
In this newsletter, we will describe the differences between VAT exemption and 0% VAT rate and those you may have to operate when you apply for them.
In this newsletter, we will describe the differences between VAT exemption and 0% VAT rate and those you may have to operate when you apply for them.
0% VAT rate vs VAT exemption
| 0% VAT | VAT exemption |
Concept | A VAT rate category | A tax preferential policy |
Input VAT deduction | Input VAT can be claimed | Corresponding input VAT cannot be claimed |
VAT invoice | Only VAT normal invoice can be issued | Only VAT normal invoice can be issued |
VAT rate | 0% | Exempted |
Taxpayer | General taxpayer | Small taxpayer + general taxpayer |
When does it apply?
0% VAT
- Export of goods and services subjected to tax refund (exemption) policies.
- Cross-border sales of services and intangible assets within the scope prescribed by the State Council, such as:
- International transportation services
- Space transportation services
- Export of the following services, assuming services are fully consumed overseas:
- R&D services
- Energy management contracting services
- Design services
- Software services
- Circuit design and testing services
- Radio and television programs (works) production and distribution services
- Information system services
- Business process management services
- Offshore service outsourcing business
- Transfer of technology
VAT exemption
- Pension services provided by pension institutions
- Medical services provided by medical institutions
- Cross-border activities which meet VAT exemption conditions, such as:
- Overseas conference and exhibition services
- Warehousing services where the storage facility is located overseas
- Export of the following services, assuming services are fully consumed overseas:
- Telecommunication services
- Intellectual property services
- Logistics auxiliary services
- Authentication and consultation services
- Professional and technical services
- Business support services
- Advertising services where the advertisement is released overseas
- Intangible assets
Points of attention
- 0% VAT is a statutory tax rate.
- If it complies with the provisions of the Law, 0% VAT can be applied and tax refund (exemption) procedures should be monthly reported to the tax authorities.
- VAT exemption is a preferential tax policy, which generally needs to be reported to the tax authorities for recording.
- Taxpayers can waive the 0% VAT rate and choose instead VAT exemption.
- After abandoning 0% VAT, no application for 0% VAT shall be made within 36 months.
- The application of 0% VAT rate requires more documentations and steps compared to VAT exemption.
- Transfer Pricing policy may be requested regarding the intercompany transactions.
Mazars can assist you in the application for the VAT exemption or/and 0% VAT rate if the nature of the service provided meet the above criteria.
References:
- Ministry of Finance and State Administration of Taxation, [2016] No.36: Appendix IV on Provisions on Zero VAT Rate and Tax Exemption Policies Applicable for Cross-border Taxable Acts (link here in Chinese).
