China has introduced a value-added tax exemption policy for small-scale taxpayers to ease their tax burden and improve cash flow for small and micro businesses.

If you are a foreign-funded small-scale taxpayer operating in China, this Q&A guide will help you understand how the policy works and how to make full use of the benefits available.

Q1: When can a taxpayer be exempt from VAT?

A: Small-scale taxpayers can be exempt from VAT if their sales meet certain criteria. Those whose monthly sales are under 100,000 yuan ($14,000), or whose quarterly sales are under 300,000 yuan, qualify for the exemption.

For taxpayers eligible for the VAT differential taxation policy, the sales amount used to determine exemption is calculated after applying the differential. For example, if a taxpayer has quarterly sales of 260,000 yuan, they are eligible because the amount falls below the 300,000-yuan threshold.

Q2: Does the VAT exemption still apply if sales spike due to a real estate transaction?

A: Yes. The policy takes occasional real estate transactions into account. If a taxpayer's total monthly sales exceed 100,000 yuan due to a one-off property transaction, they may still qualify as long as their sales excluding real estate revenue remain below the threshold.

For example, if a small-scale taxpayer earns 100,000 yuan in July and 80,000 yuan in August from regular sales, and then sells a property for 2 million yuan in September, they still qualify for the exemption. After deducting the real estate sale, their quarterly sales are 180,000 yuan, which is below the 300,000-yuan threshold.

Q3: If a taxpayer qualifies for the VAT exemption, does he or she still need to file a return? How should he or she file?

A: Yes. Taxpayers must file returns even when they are VAT-exempt. Filing can be completed through online platforms such as the E-tax platform or in person at tax service halls.

When completing VAT and surtax declaration forms, taxpayers should report relevant sales in the sections for tax-exempt sales or sales below taxable thresholds. If there are no other tax-exempt items, they do not need to fill out the Detailed Declaration Form for VAT Reduction and Exemption.

Tax authorities strictly prohibit fraudulent behavior, such as splitting income or making false declarations to obtain small-scale taxpayer incentives. Such violations are subject to investigation and legal action to maintain a fair and orderly tax environment.

Source: Shanghai Municipal Development and Reform Commission

Note: The above content is for reference only. In case of any discrepancies, the Chinese version shall prevail.