China Clarifies Business Tax Exemption for Cross-border Equipment Lease Contracts

The State Administration of Taxation and the Ministry of Finance jointly promulgated the Circular on Continuously Carrying out Transitional Business Tax Exemption Policy on Cross-border Equipment Lease Contracts (Caishui [2011] No. 48) on June 10, 2011, which came into effect on the same date.  The Circular clarifies the business tax exemption policy on inbound equipment lease contracts signed prior to December 31, 2008 and for which the performance was not completed before then (“old cross-border equipment lease contracts”).

The Circular provides that, from January 1, 2010 until the expiration date of the contract, the transitional business tax exemption policy will continue to apply to the income earned by offshore units or individuals from the performance of old cross-border equipment lease contracts (including financing leases and operating leases).

Old cross-border equipment lease contracts refer to contracts that meet all of the below requirements:

(1)       The contract is entered into in written form prior to December 31, 2008 (inclusive), with a lease term of more than 365 days;

(2)       The contract’s subject matters are aircrafts, ships, aircraft engines, large-scale power generation equipment, mechanical equipment, large-scale environmental protection equipment, large-scale construction machinery, large-scale petrochemical equipment, containers and other equipment.  In addition, the annual rental fee stipulated in the contracted is no less than RMB 500,000;

(3)       There have been no changes to the subject matters, lease term and rental fee provisions of the contract. Where the lessor has changed, but the above remain unchanged, the contract will still be deemed to be an old cross-border equipment  lease contract;

(4)       Prior to December 31, 2009 (inclusive), the domestic lessee (or its offshore parent company) has paid the rental fee (including bond or deposit) to the offshore lessor in foreign exchange via financial institutions in accordance with the amount stipulated in the contract.

As required by the Circular, the domestic lessee should conduct record-filing procedures with the competent tax authority prior to September 30, 2011 by presenting the old cross-border equipment lease contract, proof of payment of paid rental fees and corresponding original copy and photocopy of the invoice (or bill) issued by lessor, as well as other relevant materials required by the tax authority.

From January 1, 2010 up to the date of promulgation of this Circular, where the taxpayer paid or paid in excess, or the withholding agent withheld or withheld in excess the abovementioned exempted business tax, the relevant amounts are permitted to be credited towards future payable or withholdable business taxes.  Any outstanding amount that cannot be fully credited before the end of 2011 will be refundable.

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