Authorities Clarify Business Tax Grandfathering Policies for Cross-Year Contracts

On August 25, 2009, the State Administration of Taxation and the Ministry of Finance jointly issued the Notice on Business Tax Grandfathering Policies for Cross-Year Contracts (the “Notice”), effective January 1, 2009. The Notice clarifies that, for contracts signed on or before December 31, 2008, and effective in 2009 (“Cross-Year Contracts”), a one-year transitional period is generally granted, during which the recognition of taxable activities and determination of taxable revenue can still be based on the old regulations. The old business tax regulations will continue to apply to Cross-Year Contracts until December 31, 2009. The old business tax regulations stipulate that services provided within the PRC are subject to business tax, while, under the new business tax regulations, activities in relation to enterprises or individuals providing or receiving services within the PRC, regardless of where services are rendered, are subject to business tax. The Notice emphasizes that treatment of other tax-related issues in connection with Cross-Year Contracts, including tax rate, the starting time of taxable liabilities, locations of business tax payments, tax withholding agents, RMB conversion rates and tax preferences shall not be grandfathered, and shall be subject to the new business tax regulations.


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