Foreign companies should review changes in Stamp Duty Law in China
The Chinese authorities officially announced the Stamp Duty (SD) Law, which will become effective on July 1st, 2022 and replace the prevailing SD Provisional Regulations. Foreign investors unfamiliar with China’s stamp duty should be aware of it to avoid penalties or late payments.
The Stamp Duty Law refers to the taxes collected for various certificates, licenses and documents that are registered in transactions in China. The name originates from the use of tax stamps pasted on the corresponding tax vouchers.
While usually thought of in respect to securities sales, the stamp tax also applies to intellectual property transactions and patent grants, which will be reduced or eliminated, respectively, by this Law.
In general, stamp duty is not a major tax for most taxpayers. However, foreign companies which underpay it or not pay it at all can be subject to a fine up to 30 times tax payable. Investors should always regard compliance with China’s regulations as an essential part of their operation.
The SD Law contains 20 articles which cover the definition of taxpayers, taxable scope, SD rates, tax basis and preferential SD treatment. There are no fundamental changes made to the current SD system.
Documents issued for purchase and sale transactions, process contracting, property leasing, commodity transportation, storage and custody of goods, loans, property insurance, technology contracts and other documents of a contractual nature are subject to stamp duty.
Documents of transfer of property title; business books of account; documentation of rights or licenses; and other documents determined by the Ministry of Finance can also be taxable.
There are a few exemptions to SD, such as duplicate copies or written copies of documents on which stamp duty has already been paid; documentation in a case where a property owner donates property to the government, a social welfare unit or school; and other documents which the Ministry of Finance approves.
In regard to intellectual property, the main change will be the reduction in stamp tax from 0.5% to 0.3% on transactions, specifically, “documents on the assignment of the exclusive right to use trademark, copyright, patent right or use of know-how.” This is an incentive to support and boost innovation activities of enterprises.
The tax is determined based on the amount listed in the contract, not including value-added tax (VAT), if any.
In addition, of less importance, the stamp tax for patent grants will be eliminated. However, this is currently only 5 RMB (less than $1 USD).
The preferential SD 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, which also provides a SD exemption on dutiable accounting books. These preferential treatments have been adopted in the SD Law.
Article 5 of the SD Law establishes that the dutiable amount of a taxable contract/instrument will exclude any VAT amount specified in such contract/instrument.
If the VAT amount is not specified in the taxable documents, the entire amount in the contract/instrument may be subject to SD without any deduction of VAT. It is crucial that taxpayers segregate the contract price and VAT amount in the taxable document to avoid any dispute with the tax authorities.
Under SD Law, electronic orders between e-commerce businesses and individual buyers are exempt from SD, while orders between e-commerce businesses and other buyers (e.g., entities, enterprises, etc.) will still be subject to SD.
According to SD Law, direct donations can be exempted from stamp tax. This is different from the Corporate Income Tax Law, where donations must be done through charitable organizations or governments of county level and above, and their departments to be tax exemptible. Businesses should pay attention to this difference and not dismiss or overlook this stamp tax saving treatment when making direct donations.
The loan contract signed by enterprises and non-financial organizations are not subject to stamp tax. Also, Besides, loan contracts signed by financial institutions and micro and small-sized enterprises can be exempt from stamp tax, and the duration of the policy was extended to December 31, 2021.
Normally, the tax payable is calculated in the local RMB. Therefore, if a payment indicated in taxable documents is presented as a foreign currency, it should be converted into RMB based on the exchange rate provided by the People’s Bank of China on the signing date of the document.
All signing parties associated with a contract are legally obliged to pay stamp duty. Where tax payable exceeds RMB 500, the taxpayer may use payment certificates after receiving authorization from the tax authority, or tax may be paid at a later date, within and not exceeding one month.
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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.