Implementing Regulations Relating to PRC Business Tax

In China, a 5% "business tax" is imposed on the gross amount received for certain services and the transfer of certain intangible and immovable properties.  On December 25, 2008, the Ministry of Finance of the People’s Republic of China (“MOF”) and the State Administration of Taxation of People’s Republic of China (“SAT”) jointly issued the Implementation Rules of the Provisional Regulations of the PRC on Business Tax (“BT Rules”).  The BT Rules became effective on January 1, 2009.

While the BT Rules revised the previous regulations issued in 1993 in a number of respects, the major changes include (i) broadening the definition of taxable Chinese services; and (ii) the coordination of the BT Rules with the new Implementation Rules for Provisional Regulations of the PRC on Value-added Tax (“VAT Rules”).

New Definition of Taxable Services

Under the 1993 regulations, a service provider would only be liable for the business tax if the taxable services were rendered within China. Thus, when a foreign company provided services to a Chinese client, and such services were conducted outside of China, the foreign company would not be subject to business tax in China.  This is a common practice in services involving consulting and technical services performed outside of China.

Article 4(1) of the BT Rules has now expanded the definition of taxable services to include services performed where either the service provider or service recipient is located in China, without regard to where the services are actually performed.  As a result, after January 1, 2009, the business tax will be imposed so long as either the services provider or recipient is located in China, even if the services are in fact performed outside China.

Coordination with VAT Rules

In order to better coordinate with the VAT Rules, the BT Rules now provide specific rules regarding toe application of the VAT and business tax in circumstances where a taxpayer engages in "mixed" sales activities that involve both goods and taxable services.

Under the prior BT Rules, a taxpayer that was engaged in "mixed" sales activities was only liable for VAT tax.  Under the revised BT Rules, however, such a taxpayer must generally now pay both VAT and the business tax on the respective sale and service components of the "mixed" transaction.  A limited exception is provided, however, in the case of "mixed" transactions entered into by a taxpayer that is predominantly engaged in the production or the wholesale or retail sale of goods, with the result that such transactions will be subject only to VAT.


The new BT Rules broaden the scope of taxable services, with the result that services performed outside of China, as well as services performed as part of a "mixed" sale of goods and services, may now be subject to the 5% business tax.  Service providers that either do business in China or that have Chinese clients should therefore review their operations to evaluate the likely impact of the new rules.

Authored by:

Keith R. Gercken

(415) 774-3207


William Zheng(郑樑)