VAT General Taxpayer Status Important for FICEs
By Cory Lam and Vivian Ni
Sept. 1 – As regulations on representative offices tighten, the setting up of a foreign-invested commercial enterprise (FICE) is becoming an increasingly popular choice for foreign investors who want to engage in import and export, as well as domestic distribution activities in China. While it is critical for foreign investors to fully understand what they have to prepare exactly in order to successfully register a FICE with the related Chinese authorities, it is also equally important for most of them to apply for the general tax (value-added tax or VAT) payer status after the completion of FICE registration so they can realize genuinely cost-effective operations.
Why is VAT general taxpayer status important?
Article One of China’s “Interim VAT Regulations (State Council Decree No.538)” stipulates that all enterprises and individuals engaged in the sale of goods, provision of processing, repair and replacement services, and import of goods within China shall pay VAT, making VAT a matter of concern for most FICEs.
VAT payers in China are separated into two different categories – general taxpayers and the small-scale taxpayers – and the VAT rates vary for different statuses. While the rate for general taxpayers stands at 17 percent in most cases and 13 percent on imports of several specific goods, the rate for small-scale taxpayers is only 3 percent.
Although the VAT rate for small-scale taxpayers is much lower, obtaining the general taxpayer status is still essential and beneficial for companies with considerable annual business turnover, because the status will:
- Allow companies to deduct the input VAT from output VAT
- Increase companies’ range of potential clientele as well as credibility by allowing them to issue VAT receipts (fapiaos)
Who is eligible for VAT general taxpayer status?
According to related regulations, the official thresholds for qualification as a VAT general taxpayer are:
- Manufacturing enterprises (enterprises engaged or mainly engaged in goods production or taxable service provision) with an estimated annual taxable turnover exceeding RMB500,000
- Other types of enterprises (enterprises where at least 50 percent of their income comes from the wholesale or retail of goods) with an estimated annual taxable turnover exceeding RMB800,000
The State Administration of Taxation (SAT) document “The Management Method of VAT General Taxpayer Qualification Verification (SAT Decree No.22)” stipulates that all applicants for general taxpayer status have to meet the following conditions to have their applications proceeding:
- Having fixed premises of production and operation
- Being able to establish account books according to the unified accounting system of the State, conduct accounting in light of valid and effective vouchers, and provide accurate tax information
Recently in Dezan Shira & Associates’ Shanghai office, our accountants find that in addition to the officially written requirements, some other factors – such as the size of an enterprise’s office and its number of employees – may also affect the local tax authority’s judgment on whether or not the applicant is eligible for general taxpayer status.
Jenny Zhang, manager of Dezan Shira & Associates’ corporate accounting services team in Shanghai, gave a few such examples.
“If a FICE has a small office that only covers an area of less than 15 square meters, or has a very small number of employees, the tax officer may wonder where the company stores its goods and how it is capable of realizing a considerable size of business turnover. For FICEs engaged in certain industries, the tax officer may also want to see if they have warehouses – especially when there is not enough space seen in their offices to store their goods,” Zhang said.
Those “soft requirements” may also vary across regions. In Beijing, tax officials may ask a company about the availability of signed purchase/sales contracts or for a list of major corporate accounts within China and overseas. They also seem to prefer the company to have a warehouse located in Beijing, and not in surrounding areas. In some areas of South China, it seems that whether or not a company has independent working space/room for its finance team could also affect local tax authority’s evaluation of the applicant.
For newly established enterprises that want to be recognized as general taxpayers, it is important that their estimated annual taxable sales value exceeds a certain threshold set out by the tax bureau. However, the regulations governing that threshold are not clearly specified in the “Interim VAT Regulations” and other accompanying implementation rules. In practice, it is largely dependent on the interpretation of the tax authority in charge.
It should also be noted that newly-verified general taxpayers are required to complete a three to six-month probationary period before becoming a permanent general taxpayer. During the probationary period, a wholesale business with registered capital of no more than RMB800,000 and staff of no more than 10 people will see a billing limit of RMB100,000 on the fapiaos it can purchase from the tax authority. In addition, the local tax authority has the power to decide the amount of fapaios it will provide to taxpayers on each purchase, while the maximum amount of fapiaos provided within one purchase will not exceed 25. There are also numerous other requirements in purchasing fapiaos – for example, in some cases the company may be required to put down a 3 percent advance payment of the VAT each month.
Due to the complexity in application for general taxpayer status, it is vital for foreign invested enterprises to get good advice from local specialists before embarking on applications. An experienced local tax expert may provide companies with effective solutions that avoid the unexpected hit of “soft requirements” invisible in legal documents which will increase the chances for successful application. For foreign investors who plan to start up a company, consultation with specialists should start even before company registration, because some pre-registration preparations – such as planning for a proper size of registered capital – may influence a variety of issues down the line. In the case of application for general taxpayer status, the size of registered capital may impact on the tax authority’s estimation of the company’s annual taxable sales value.
How to apply for the general taxpayer status?
Businesses can only apply for the VAT general taxpayer status at the very end of the incorporation process, that is, once all the post-registrations are completed with the relevant government agencies/authorities. The procedures of application can vary from city to city, but the application process is largely as follows:
- Download the VAT General Taxpayer Application Form here and fill it out
- Submit the application form, required documents (see the list of required documents below) and processing fee of RMB50 to the local office of the SAT
- Applications are normally processed within 30 days of receipt, after which all documents will be returned
- Tax officials may interview the applicant and conduct working site inspection
- Successful applicants will be given a VAT General Taxpayer Verification Form to be completed and returned
- Fapiao purchase license will be issued and a fapiao printer can then be purchased
It should be noted that the general taxpayer status will be reviewed annually and applicants will not be reverted to small-scale taxpayer status in the future.
*General list of required documents (Requirements for documents may vary across regions)
- VAT general taxpayer application form (three copies)
- Business License, Tax Registration Certificate
- Legal representative’s ID
- Identity and professional qualifications of financial officer or appointed accountant in Chinese
- Proof of bank account and capital verification report
- Medium to large commercial enterprises with registered capital exceeding RMB5 million or over 50 employees should aslo submit a list of employees (containing names, ID numbers, social insurance details and years of contract)
- Commercial enterprises with registered capital of less than RMB5 million or fewer employees than 50 should also submit copy of a purchase and sales contract in Chinese
- Company’s financial policy in Chinese
- Invoice control policy in Chinese
- Articles of Association
- Export enterprises should also submit export permission or China Customs record
- Branch entities may also be required to provide proof of existing general taxpayer status and certificate of annual inspection
Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China. The firm specializes in assisting foreign enterprises establish and operate legal entities in China such as FICE. For advice, please email firstname.lastname@example.org, visit www.dezshira.com, or download the firm’s brochure here.
Trading and Establishing FICE in China
In this issue of China Briefing Magazine, we evaluate the suitability of ROs, walk you through the details of FICE (including establishment procedures), discuss franchising in China for foreign companies, and put in a few words about the Chinese consumer from a macroeconomic perspective.
Doing Business in China
Our 156-page definitive guide to the fastest growing economy in the world, providing a thorough and in-depth analysis of China, its history, key demographics and overviews of the major cities, provinces and autonomous regions highlighting business opportunities and infrastructure in place in each region. A comprehensive guide to investing in China is also included with information on FDI trends, business establishment procedures, economic zone information, and labor and tax considerations. Priced at US$40 (PDF)
Setting Up Wholly Foreign Owned Enterprises in China (Third Edition)
This guide provides a practical overview for any business-minded individual to understand the rules, regulations and management issues regarding establishing and running a WFOE in China.