A Comprehensive Guide to China's Value-A

A Comprehensive Guide to China's Value-Added Tax (VAT) Prepayment System: Key Policies and Practical Points

 

In China's VAT collection and management system, the prepayment mechanism serves as a crucial link in balancing the timing of tax revenue inflows and mitigating tax risks. For different taxable activities, differentiated prepayment rules and operational requirements have been clearly defined in relevant policies.

 

In the field of construction services, according to the Notice of the Ministry of Finance and the State Taxation Administration on VAT Pilot Policies for Construction Services and Other Sectors (Caishui 〔2017〕 No. 58), when taxpayers receive advance payments for construction services, they shall calculate the prepayment base as the balance of advance payments minus subcontracting fees paid, and apply different prepayment rates based on their tax calculation methods: a 2% prepayment rate for projects using the general tax calculation method, and a 3% prepayment rate for projects using the simplified tax calculation method. Further, the Announcement of the State Taxation Administration No. 17 of 2016 specifies that the prepayment rules for cross-county (city, district) construction services within the same municipality directly under the Central Government or planned city shall be determined by the local tax authority. Starting from January 1, 2026, construction enterprises in Beijing, Shanghai, Tianjin, Chongqing, as well as Dalian, Qingdao, Ningbo, Xiamen, and Shenzhen will no longer be required to make prepayments when receiving project progress payments for cross-district construction within their respective cities (adjusted from the current prepayment policy), which further simplifies the tax process for intra-regional construction projects.

 

For real estate development enterprises, VAT prepayment focuses on the pre-sale stage. In accordance with the Announcement of the State Taxation Administration No. 18 of 2016, enterprises shall prepay VAT at a 3% prepayment rate when pre-selling self-developed real estate projects. It is important to note that the prepayment rule does not apply to the sale of completed real estate; instead, taxes shall be calculated and paid directly at the corresponding VAT rate, avoiding policy confusion between pre-sale and spot sale stages.

 

Regarding the leasing of immovable properties, policies require taxpayers (excluding individual taxpayers) leasing immovable properties not located in the same county (city) as their institutional domicile to make prepayments either in the tax declaration period of the month following the receipt of rent or within the tax period verified by the competent tax authority at the location of the immovable property. Additionally, if the leasing service is provided on an advance payment basis, the tax liability arises on the date when the advance payment is received, ensuring the timely collection of taxes for cross-regional immovable property leasing.

 

Notably, preferential prepayment policies for small-scale taxpayers remain in effect. Pursuant to the Announcement of the State Taxation Administration No. 1 of 2023, from January 1, 2023, to December 31, 2027, eligible small-scale taxpayers subject to prepayment requirements shall be exempted from prepayments in the current period if their monthly sales volume at the prepayment location does not exceed RMB 100,000 (or quarterly sales volume does not exceed RMB 300,000 for quarterly tax filers). If the monthly sales volume exceeds RMB 100,000, prepayment items applicable to the 3% prepayment rate shall be subject to a reduced prepayment rate of 1%. This preference not only eases the capital pressure on micro and small enterprises but also reduces administrative costs, serving as a key tax measure to support the development of small-scale taxpayers.