It is common for the contractual parties to make the terms regarding to the liquidated damages into the contract. Shanghai Dongjin is introducing what kind of situation that the liquidated damages are subject to the tax and the Fapiao should be issued.

Scenario A:The purchaser pays the liquidated penalty when the contract has not been performed and the transaction has not taken place.

• It is not subject to the VAT and Fapiao is not required to be issued.
• Legal Basis: Implementing Rules for the Administrative Measures of the People's Republic of China for Invoices (Revised in 2014)
  • Article 26 Units and individuals that fill in and issue invoices shall issue invoices when business income is recognized after a business transaction has taken place. Invoices shall not be issued prior to the occurrence of business activity.
• If the transactions or services have not taken place, no Fapiao is required to be issued and no VAT should be paid.
• If the deposit is forfeited or be double paid, the Party who receive the money is not required to issue Fapiao and pay VAT. Such money can have pre-tax deduction based on the signed contract, the payment proof or the court verdict.

Scenario B: The purchaser pays the liquidated penalty when the contract has been performed and the transaction has taken place.

• It is subject to the VAT and Fapiao is required to be issued.
• Legal Basis:
  • As mentioned in the Attachment 2 of Circular on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax (Cai Shui [2016] No.36), the liquidated damages paid due to the late payment should be deemed as the ” OTHER CHARGES” gained. It should be included into the sales turnover and is subject to the VAT. Fapiao should be issued.
  • As mentioned in the Implementing Rules for the Interim Regulations of the People's Republic of China on Value-added Tax (Revised in 2011):Article 12 The term "other charges" as used in the first Paragraph of Article 6 of the Regulations refers toliquidated damages, late fees, interest accrued for delayed payments and the etc.It should be included into the sales turnover and is subject to the VAT. Fapiao should be issued.
  • As mentioned in the Notifications of the State Tax Bureau Regarding to the Payment of VAT (GuoShuiFa[1996]No.155), the other charges from the purchaser or the deposit of the delayed packaging goods should be deemed as the taxed income. During the accounting, it should be calculated to the untaxed income and subjected to the VAT.

Scenario C: The seller pays the liquidated penalty when the contract has been performed and the transaction has taken place.

• It is not subject to the VAT and Fapiao is not required to be issued.
• Legal Basis: Implementing Rules for the Administrative Measures of the People's Republic of China for Invoices (Revised in 2014)
  • Article 26 Units and individuals that fill in and issue invoices shall issue invoices when business income is recognized after a business transaction has taken place. Invoices shall not be issued prior to the occurrence of business activity.
• If due to the quality issues, the seller or the service provider pays the liquidated damages to the purchaser, it is not subject to the VAT and Fapiao is not required to be issued because the transaction or service is not provided by the purchaser.

If you have any questions, please send the email to me.

Mr. Mike Chang

TEL: 0086-21-68868321 / FAX: 0086-21-68868021

Email: mikechang@shanghaiinvest.com