Transition from Business Tax to VAT system in China: New VAT policies for finance leasing services

As part of the transition from the Business Tax to the VAT system in China, the State Administration of Taxation (SAT) has released:

  1. Announcement [2015] No. 90 “Announcement on relevant VAT issues in relation to the transition of business tax to VAT”, and
  2. Caishui [2015] No. 144 (“Circular 144”) on Stamp Duty policies.

Key objective:

  • To implement unified VAT policies, and
  • To clarify VAT issues in particular for finance leasing services. 

The main technical points brought to the finance lease industry by these new policies are the followings:

*Factoring  is afinancial transaction in which a taxpayer sells its income  receivable (i.e., invoices) to a third party (called a factor) at a discount.

Over the past years, finance leasing services companies have been facing several issues that the new regulations are trying to tackle such as the followings:

  • The Caishui [2013] No. 106 also allowed finance leasing companies to deduct principal from the VAT taxable income. However, the Circular requires that the deduction of principal shall be based on valid invoices issued by the lesser. However, it might be difficult for lessees to issue VAT invoice as a Business Tax (BT) payer and in the absence of valid VAT invoice, the tax risks may arise for finance leasing companies.
  • For factoring agreements, the VAT treatment regarding the transfer of lease income receivables to financial institutions was unclear. Indeed, lessor could not continue to issue VAT invoices after it transferred lease income receivables to other parties in factoring transactions. And this has caused some troubles as lesser needs valid VAT invoices to claim input VAT deduction on the lease payments and financial institutions are not able to issue VAT invoices as Business Tax payer.

We understand that the new VAT policies will bring the followings to the finance leasing services industry:

On one hand, these new regulations will have positive impacts for the finance lease industry as it will clarify the VAT treatments and address VAT issues they are facing for several years now. On the other hand, finance leasing companies might encounter new challenges that they will have to tackle in order to minimize the impacts of these reforms on their businesses.

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