Announcement No. 28 of 2026 — the Measures for the Withholding of VAT on Natural Persons by Domestic Entities — has been in force since 1 November. Two weeks ago we explained what changes; this article does not repeat that. It deals only with what to do from now on.

Start with the point most often missed: the obligation arises at the moment of payment, not at month-end closing. If the first November payment to a domestic individual for consulting services reaches the per-transaction threshold, the obligation exists when you pay. Fixing the paperwork afterwards fixes the process, not the obligation.

AC Core Highlights

· In force now: from 1 November 2026, when a domestic entity pays a domestic natural person for the seven listed services and the per-transaction (per-day) amount reaches the per-transaction VAT threshold, the payer withholds VAT and surcharges (Arts. 1, 3, 4)

· The list of seven is closed: R&D, software, design, consulting, radio/film/television programme (work) production, cultural services, education. There is no catch-all; services outside the list carry no VAT withholding

· VAT only: individual income tax on labour remuneration is a separate regime, withheld by the payer and assessed independently — do not merge the two

· The transition is over: for 1 January to 31 October 2026, natural persons continued to self-declare under Article 44 of the VAT Law Implementing Regulations (Art. 15)

· Four-step test: is the payee a domestic individual → is the service on the list of seven → has the per-transaction (per-day) threshold been reached → has the tax already been settled

· Three process gaps that create manual work on every later payment: contract tax clauses, payment-request fields, withholding filings and document retention

1. What Actually Changed Is Timing

Until the end of October this was something that would change. From 1 November it has changed. The text is identical; its character is not: the act of payment is now the trigger.

One item worth checking this week: where does a contract signed in October but paid in November fall? On the wording of the measures, the test looks at the time of payment, not the date of signature — a consulting contract signed in October and paid in November is caught. Local practice on cross-period contracts may take some time to settle, so confirm payment dates and amounts in the contract now rather than after the money has moved.

2. The Four-Step Test — No Shortcuts

1. Is the payee an employee? If yes, salary rules apply and these measures do not. If not, continue.

2. Is the service on the list of seven? If yes, continue. If not, no VAT withholding — but individual income tax still needs a separate assessment.

3. Domestic or foreign individual? The measures cover domestic natural persons only. Payments to foreign individuals follow a different set of rules.

4. Threshold and settlement: has the per-transaction (per-day) amount reached the threshold, and has the tax been paid? Reached and unpaid → withhold VAT and surcharges. Below the threshold → no VAT withholding. Tax already settled → no VAT withholding.

Get any step wrong and the result is either an omission or an over-withholding. Over-withholding is the more painful of the two: you have withheld VAT on a service outside the list, and the payee wants the money back while you file a correction and explain it.

3. Five Moves Finance Can Make This Week

1. Contracts: add a tax clause. State whether the fee is VAT-inclusive, what the net payment will be after withholding, who bears the tax, and what happens if the individual refuses to invoice. Leaving this until year-end makes it harder to negotiate.

2. Vendor master data: add a "payee type" field — employee / domestic individual / sole proprietor / foreign individual / entity. Accurate classification is the precondition for every later judgment.

3. Payment request forms: add two checkboxes — "is the service on the list of seven" and "has the payee already invoiced and settled the tax". Make the business side answer at submission, not finance at payment date.

4. Calculation and filing: decide who computes, who reviews, and which filing period applies. Keep a dedicated withholding ledger and reconcile it to bank records monthly.

5. Document retention: see next section.

4. Three Boundaries Most Often Misjudged

Boundary one: an invoice is not proof of tax paid. What counts is whether the tax has actually been paid, not whether an invoice has been issued. Where the individual has invoiced and settled the tax, no VAT is withheld; where the invoice exists but the tax has not been paid, withholding still applies. Treating the invoice as the end of the matter is the most common error under this policy.

Boundary two: per-transaction (per-day), not monthly. The wording is the per-transaction or per-day amount reaching the threshold. Several payments to the same person on the same day may need to be aggregated. Splitting contracts or payments does not change the obligation and leaves a trail.

Boundary three: domestic individuals are not foreign individuals. Announcement No. 28 covers domestic natural persons. Payments to foreign individuals follow different rules, including whether the service is taxable in China at all. In practice the two are often mixed in the same schedule — keep them separate from the start.

5. A Worked Example

In November a company pays RMB 10,100 for consulting services, with no invoice issued by the individual and the threshold met. Using the current 1% levy rate for small-scale taxpayers and surcharges of 12% for illustration (the applicable rate on filing governs):

| Item | Calculation | Amount | |---|---|---| | Net sales | 10,100 ÷ 1.01 | RMB 10,000 | | VAT | 10,000 × 1% | RMB 100 | | Surcharges | 100 × 12% | RMB 12 | | IIT on labour remuneration | 10,000 × 80% × 20% | RMB 1,600 | | Total withheld | | RMB 1,712 | | Received by the individual | | RMB 8,388 |

Three notes: the IIT base excludes VAT; IIT is a separate regime and should not be folded into the VAT withholding step; and the individual receives about 17% less than the contract amount. If this is their first time, explain it before you pay, not after.

6. Three Things to Keep

· The basis for the decision: one sentence on the voucher saying why you withheld, or why you did not. You will need it later.

· The calculation sheet: gross amount, levy rate, VAT, surcharges and IIT, listed separately.

· The filing record: confirmation of the withholding return, matched to the payment record.

7. How AC Helps

AC has worked with foreign investors in China since 2003; company setup and changes, equity restructuring, non-trade payments and import-export agency are our daily work. Whether this obligation reaches your payment process, how to amend contract clauses, and whether your arrangements with external consultants and independent experts need adjusting — send us your payments to natural persons over the last three months and we will go through them with you.

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.