Placing existing Chinese taxes on a statutory basis is part of Chinese government plans to enhance tax certainty in China. The most recent development in this space is that China’s Stamp Duty Law, passed by the National People’s Congress, came into effect on July 1 2022.
Stamp duty was previously based on 1988 regulations issued by the State Council, the latest amendments to which were made in 2011. This is the 12th tax, out of 18 Chinese taxes, to be placed on a statutory basis in China.
Key changes
While the new law does not fundamentally alter the framework for stamp duty, the taxing categories, tax rates, preferential treatments, and levying arrangements are simplified and enhanced. Notable changes include the following:
Narrowed tax scope – stamp duty was previously levied at a fixed amount (RMB 5 ($0.74) per document) on the documentation supporting certain rights and licences, such as land use right certificates and business licences. This imposition is now eliminated.
Reduced tax rate for certain types of contracts and documents – service contracts for processing, construction, and transportation, and documents for the transfer of rights such as copyright and patents had been subject to stamp duty at a rate of 0.05%. This is now reduced to 0.03%.
Stamp duty and e-commerce – e-orders digitally signed between individuals and e-commerce operators will be exempted from stamp duty. This facilitates the further development of e-commerce in China.
Bringing the stamp duty levy on securities transactions into law – this was not listed in the tax categories in the previous State Council regulation. As a result, the tax rates on such transactions were frequently adjusted by the central government, leading to uncertainty. The law now covers this explicitly and provides for a rate of 0.1% imposed on transferors. This will bring more stability to the securities market.
VAT and stamp duty tax base – VAT is clarified as being excluded from the tax base for the calculation of stamp duty. This was not explicitly addressed in the previous regulation and led to many disputes.
Penalties – it is now provided that the administration of stamp duty is dealt with under the Tax Collection and Administration Law (the ‘TCA Law’), which covers the other Chinese taxes. This reduces the magnitude of potential penalties from up to 20 times the amount of the overdue stamp duty under the regulation to between 0.5 and 5 times under the TCA Law.
Implementation rules
To complement the law, the Chinese Ministry of Finance (MOF) and the State Taxation Administration (STA) in June jointly released implementation rules for the law. The notable matters are:
Contracts concluded outside China – the law provides for the imposition of stamp duty where a contract is concluded outside China but used in relation to assets or activities within China. The implementation rules set out the specifics of such situations. These include instances where the contract relates to:
Chinese immovable property;
An equity interest in a China tax resident enterprise; or
Movable property, trademarks, copyright, patents, or know-how rights, where the seller or the buyer is located within China. Stamp duty excludes from scope instances where these items are sold by overseas enterprises or individuals to Chinese enterprises or individuals and are used entirely outside China.
A service and the service provider or the recipient is located within China. This excludes the case that the service is provided by overseas enterprises or individuals to Chinese enterprises or individuals and is consumed entirely outside China.
Entrusted loans – the implementation rules clarify that the taxpayers for an entrusted loan contract (whereby a bank facilitates lending between companies in China) are the entrusted party (the bank) and the borrower, but not the entrusting party (the initial corporate lender). Previously there were many disputes in practice on where the liability lay, given the lack of clear guidance in the regulation.
No written contract – the implementation rules clarify that in the absence of a written contract, the law looks to ordering documents or demand lists. Where these certify the trading relationship and specify the rights and obligations of both parties, the stamp duty shall be paid even if the seller and the buyer did not sign a contract.
Looking ahead
While the law and implementation rules provide greater certainty for stamp duty, there are still many practical problems that have not been addressed at this stage; for example, stamp duty treatment for a group’s centralised procurement function. It is expected that the Chinese authorities will make further clarifications in due course.
