The new Stamp Tax (ST) Law in China, effective since July 1, 2022, has been updated to simplify the existing system of taxation, as well as change some tax rates and establish new exemptions.
This new law will replace the existing Stamp Duty Interim Regulations.
The Stamp Tax Law contains 20 articles which cover the definition of taxpayers, taxable scope, rates, tax basis and preferential treatment. There are no fundamental changes made to the current system, however, a few items are noteworthy, such as the simplification of tax items and tax cuts.
The ST rate on instruments for the transfer of trademarks, copyrights, patents, and know-how will be reduced from 0.5% to 0.3%. This is an incentive to support and boost innovation activities of enterprises.
The preferential ST rate of 0.025% (which was reduced from 0.05%) on paid-in capital and capital reserves recorded in the accounting books of an enterprise was originally promulgated in Circular 50 (reduction and exemption on accounting records). Circular 50 also provides an exemption on dutiable accounting books. These preferential treatments have been adopted in the new ST Law.
According to Article 5 of the ST Law, the dutiable amount of a taxable contract/instrument will exclude any VAT amount specified in such contract/instrument.
One potential issue is if the VAT amount is not listed in the taxable documents, the entire amount may be subject to ST without any deduction of VAT. To mitigate any controversy between taxpayers and tax authorities, it is important to segregate the contract price and VAT amount in the taxable documents.
Electronic orders between e-commerce businesses and individual buyers will not be taxable transactions under the ST Law. In other words, for electronic orders between e-commerce business and individual buyers, both the seller and buyer are exempt from ST, while orders between e-commerce businesses and other buyers (e.g., entities, enterprises, etc.) will still be subject to ST.
It is important to keep in mind that the new Stamp Tax law is a legislation and no longer a regulation issued by the Ministry of Finance and the State Taxation Administration, therefor it has higher legal power and implications.
The stamp tax on securities transactions will continue to be levied on the transferor of securities transactions rather than the transferee, and the applicable tax rate remains at 0.1 percent of the turnover.
According to the ST law, direct donation can be exempted from stamp tax, which is different from that in the Corporate Income Tax Law, where donations must be done through charitable organizations or government offices at the county level and above and their departments to be tax exempt.
Companies should be aware of this aspect, and not dismiss or overlook this stamp tax saving treatment when making direct donations.
Loan contracts signed by enterprises and non-financial organizations are not subject to stamp tax. Circular 77 states that the loan contracts signed by financial institutions and micro and small-sized companies can be exempt from ST. This policy was extended to December 31, 2023, by the Ministry of Finance and the State Taxation Administration.
Eligible businesses can use this policy to save taxes on loan contracts.
In the past few years, the Chinese government has accelerated the process of upgrading relevant tax regulations into law, to improve the certainty of tax policies, enhance the authority of the tax documents, and ensure the efficiency of tax administrations.
This effort is part of a broader campaign to ensure better compliance, achieve rule of law and minimize tax evasion in the country.
Currently, 12 of the 18 existing taxes have become law and carry a stronger legal weight. Foreign businesses should stay informed and be prepared to adapt to future changes regarding the payment of taxes in China. To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at firstname.lastname@example.org.
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.