Since January 1, 2009, foreign-invested enterprises (FIEs) in China no longer enjoy value-added tax (VAT) refunds on their purchases of domestically-made equipment. On December 25, 2008, the Ministry of Finance and the State Administration for Taxation jointly issued the Circular on Abrogating Tax Refund Policies for Purchases of Domestically-Made Equipment by Foreign- Invested Enterprises, Cai Shui (2008) 176, the Circular). The Circular grants a six-month grace period for the FIEs affected by this policy change.  

Under the Circular, an FIE that purchases domestically-made equipment on or before June 30, 2009, may choose to enjoy the VAT refund policy if all of the following conditions are met:

  1. The FIE has already obtained the Certificate of Foreign-Invested Projects Consistent with the State Industry Policies on or before November 9, 2008, and has filed the certificate with the competent taxation authority on or before December 31, 2008;
  2. The FIE actually purchases the equipment, obtains the VAT special invoices, and applies to the competent taxation authority for a VAT refund on or before June 30, 2009; and
  3. The purchased equipment is included in the List of Domestically-Made Equipment for Project Procurement.  

If an FIE has enjoyed the VAT refund policy for its purchase of domestically-made equipment, the input VAT generated from that purchase may not be further credited against the FIE’s output VAT.  

Domestically-made equipment that is purchased by an FIE and has been used to apply for a VAT refund will be subject to five years of supervision (Supervision Period) by the competent taxation authority. During the Supervision Period, if the FIE becomes a domestically-invested enterprise, the equipment’s ownership changes through a transfer or donation, or the equipment is leased out or used for reinvestment, the enterprise must compensate the taxes previously refunded according to the following formula:  

Taxes to be compensated= the equipment’s net book value after depreciation × the applicable VAT rate.  

The current VAT rates are mostly 17 percent or 13 percent.  

Affected FIEs should carefully plan their schedules for purchasing fixed assets in order to take advantage of the grandfathering treatment set forth by the Circular.