China Tax Law  The Urban Maintenance and Construction Tax Law

On September 1st, 2021, the "Urban Maintenance and Construction Tax of the People's Republic of China" (hereinafter referred to as the "Urban Construction Tax Law") came into effect, replacing the current "Interim Regulations of the People's Republic of China on Urban Maintenance and Construction Tax" (hereinafter referred to as "Urban Construction Tax Regulations").

Immediately afterwards, the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) Announcement [2021] No. 28, hereinafter referred to as the "Announcement”, was officially released, stipulating the methods for determining the taxable base for the Urban Construction Tax and Surtaxes, and clarifying certain outstanding issues.

This newsletter will address the new regulations of the Urban Construction Tax Law as well as the Announcement and the current practices in tax collection and management. It sorts out the new amendments to the “Urban Construction Tax Law” and analyses how it affects your company's practical business.

Change 1: Urban Construction Tax treatment of overseas companies and individuals selling labor, services, and intangible assets to China

This change is new and was not mentioned before in the Urban Construction Tax Regulations and other tax policy regulations.

Change 2: Clarify that the amount of tax exemption and deduction should be levied on Urban Construction Tax

In fact, this is not an amendment, but merely a matter of incorporating the policy provisions enacted in previous proclamations into the Urban Construction Tax Law.

Change 3: Clarify that the basis for calculating and levying Education Surcharges and Local Education Surcharges is consistent with the Urban Construction Tax.

Impact on your company’s practical operations:

The main impact of the new policy changes concerns the withholding tax on non-trade-related foreign payments. (Background: China levies withholding tax on payments made by companies in China for services, licenses, interest, dividends, etc., which are made to foreign companies. The foreign service provider is taxable, while the Chinese service recipient pays the tax.) Before September 1st, 2021, your company, when acting as a VAT withholding agent, had to withhold VAT and consumption tax (if applicable) as well as Surtaxes which are imposed on taxpayers of VAT (urban construction and maintenance tax, education surcharge and regional education surcharge) - when payments for labor services, services, or intangible goods abroad were done. But according to the aforementioned guidelines, effective from September 1st, 2021, the aforementioned Surtaxes will no longer be required to be withheld and paid when paying for labor, services and intangible assets abroad by companies based in China.

It should be noted that the non-levy of Urban Construction Tax stipulated in Article 3 of the Urban Construction Tax Law does not cover the sale of real assets located in China by foreign entities and individuals. In accordance with the relevant laws and regulations on VAT, when overseas entities and individuals sell real estate located in China, they may still pay Surtaxes such as Urban Construction Tax.