Under Circular Cai Shui [2016] No. 36, on implementing measures for the full expansion of the VAT reform, VAT exemption applies to domestic taxpayers conducting a series of crossborder taxable activities.

On May 6, 2016, SAT released Announcement [2016] No. 29, on administrative measures on VAT exemption for crossborder taxable activities under the VAT reform (trial measures) (“the Measures”) specifying the scope of crossborder taxable activities that qualify for VAT exemption, and the requirements and documents that must be filed to apply the policy.

Highlights of the Measures:

  1. Specific scope of qualified crossborder taxable activities:
  • Construction services must be provided to engineering projects located overseas, including services provided by the general contractor and the subcontractor.
  • Radio and television broadcasting services must be provided in overseas cinemas, theaters and similar venues. This excludes services provided to overseas viewers through domestic radio stations, television stations, satellite, internet and cable.
  • Logistics ancillary services (except for warehousing and delivery, which are specifically defined) include aviation ground services, port and dock services, freight and passenger station services, salvage and rescue services, and loading and moving services provided to foreign companies engaging in international, Hong Kong, Macau and Taiwan transport and stopping over at China’s airports, ports, stations, territorial airspace, inland waterways and territorial seas.
  • Attestation and consultancy services whose effective recipient is located in China, or that relate to domestic goods or real estate, do not qualify as crossborder taxable activities.
  • Advertising services must have the advertisement distributed overseas.
  • Transferred intangible assets, except for technology, must be fully consumed overseas, i.e., the VAT exemption policy does not apply to any of the following situations: 
  1. The intangible assets are not fully consumed overseas.
  2. The transferred use right of the natural resources relates to domestic natural resources.
  3. The transferred asset operating right of infrastructures or the transferred franchise of public utilities relates to domestic goods or real estate .
  4. The transfer of quota, franchise, dealership, distribution right or agency right in selling goods, services, intangible assets or real estat e domestically to foreign companies.
  • International transport services include those provided without one’s own means of transport or the corresponding permits. Therefore, if a taxpayer that does not have the international transport permit enters into an international transport contract with its client, thus bearing the transport risk as the carrier and collecting the service fee, and then subcontracts the international transport service to a licensed carrier, the corresponding service fee may be exempt from VAT. 
  1. Transactions carried out by domestic taxpayers with companies or individuals located within Customs’ specially supervised areas do not qualify as crossborder taxable activities, but are considered domestic transactions instead.
  2. When applying the VAT exemption on qualified crossborder transactions, taxpayers will account separately for the turnover of these taxable activities and accurately calculate the applicable input VAT, which is not deductible and must be accounted as cost. Taxpayers must not issue VAT special invoices in these cases.
  3. Income from crossborder transactions that qualify for VAT exemption must be received overseas. This is deemed to happen in the following situations:
    1. Provision of logistic ancillary services to foreign airlines, when income is received through the Civil Aviation Administration of China (“CAAC”) Settlement Center, the Accounting Center of China Aviation and the representative offices established by approval of CAAC.
    2. Provision of logistic ancillary services to foreign shipping companies, when income is received through the designated agent of the foreign shipping companies.
    3. For crossborder intragroup services, when income is received from a domestic settlement company, i.e., the fund settlement company that undertakes the fund centralized operation management function within a multinational company group, including financial companies, cash pools and fund settlement centers.
    4. Other situations provided by SAT.
  4. Taxpayers providing VAT zero-rate activities can choose to apply the VAT exemption policy instead. Once they opt for this policy, however, they cannot go back to applying the zero-rate policy for the following 36 months.
  5. To apply the VAT exemption policy, taxpayers must file the following documents with the competent tax authorities:
    1. Standard VAT exemption filing form on crossborder taxable activities.
    2. Original and photocopy of the relevant contracts. If the contract is in English, a Chinese translation bearing the legal representative’s signature or the company’s official stamp is required.
    3. For activities that must be carried out overseas, original and photocopy of evidence showing the service location is overseas.
    4. For provision of qualified international transport services, proof that the services are effectively provided.
    5. Proof that the service recipient is located overseas.
    6. Other documents provided by SAT.

The Measures replace SAT’s Announcement [2014] No. 49.

Date of issue: May 6, 2016. Effective date: May 1, 2016