AC Core Highlights

1. What Announcement No. 28 Does

From 1 November 2026, under Announcement No. 28 issued by the Ministry of Finance and the State Taxation Administration, when a domestic PRC entity pays a PRC resident individual (who is not its employee) for certain services, the paying entity becomes the VAT withholding agent — it must withhold VAT and surcharges upon payment, on top of the existing individual income tax (IIT) withholding.

Two points often misunderstood: the announcement only adds VAT & surcharge withholding, and IIT rules remain unchanged — the two obligations are assessed independently. During the transition period (January – October 2026) the new measure does not apply; individuals continue to self-declare VAT through invoice issuance.

2. The 7 Categories (a Closed List)

VAT withholding applies only when the individual provides: R&D; software; design; consulting; radio, film and television programme (work) production; cultural services; education services. The list is closed — there is no catch-all clause. Services outside the list (construction, transport, warehousing, leasing, sale of goods, repair services, customs brokerage, HR outsourcing, etc.) require no VAT withholding by the payer; the individual self-declares through invoice issuance. IIT, however, must still be assessed separately.

3. When Withholding Is Triggered (All Must Be Met)

· The recipient is a PRC resident individual — not an employee, not an individually-owned business or another entity;

· The payer is a domestic enterprise or unit;

· The service falls within the 7 categories;

· The single transaction reaches the per-transaction VAT threshold;

· The individual has not already issued a VAT invoice and paid VAT (in which case no VAT is withheld).

Below the threshold there is no VAT to withhold, but the payer must still complete the withholding declaration. Platform-based workers (declared by the platform) and salaried employees are out of scope.

4. IIT Is Unchanged

For labour remuneration (the typical case for consultants, designers and external experts), the payer must withhold IIT: where income ≤ RMB 4,000, (income − 800) × rate; where above, income × 80% × rate, at 20% / 30% / 40%. The base excludes VAT, and the tax is merged into the individual’s annual comprehensive-income settlement. For business income (individuals who run their own operation and bear the risks), the payer has no withholding obligation.

5. A Worked Example

In November 2026 a company engages an individual consultant for a fee of RMB 10,100 (invoice not obtained, threshold met, levy rate 1%, surcharges 12%): net sales 10,000; VAT 100; surcharges 12; IIT 10,000 × 80% × 20% = 1,600. Total withheld 1,712; the individual receives 8,388.

6. Compliance Points

· The list is closed — do not withhold VAT outside the 7 categories;

· Failure to withhold VAT or IIT may result in a fine of 0.5–3 times the tax under the Tax Collection and Administration Law; the responsibility sits with the paying entity;

· The threshold is judged per transaction, not monthly — do not split contracts to avoid it;

· Update contract tax clauses and inform overseas parent companies early;

· Add a service-category check to the payment approval workflow.

AC has served SMEs in China for over 20 years. We can assist with tax determination of specific payments, contract clause revision and financial process optimization. If you need help, feel free to leave us a message.

Disclaimer: This article is interpreted by AC Consulting for reference only. It does not constitute tax, legal or compliance advice. All implementation standards shall be subject to the latest official documents released by competent authorities.