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Starting this year, Chinese authorities are advancing the schedule for Value Added Tax payments for businesses that receive payments before delivering services. This change will require companies to pay taxes sooner and could influence their tax classification.
In everyday settings, numerous service sectors—such as property management, education and training, beauty salons, hair salons, and gyms—often collect payments upfront and then provide their services gradually over time.
According to new VAT regulations issued by the Ministry of Finance and the State Taxation Administration, if a taxpayer receives an advance payment for services to be rendered later, the VAT liability will now be due at the earlier of two points: either when the service officially begins or the date specified in the contract. Companies must report and pay VAT on the full amount received.
This adjustment will significantly affect industries like property management, education, training, and beauty services, which commonly receive upfront payments and top-ups, explained Ge Yuyu, an associate professor at Shanghai National Accounting Institute. Previously, after customers made payments or added funds to their accounts, most businesses did not immediately pay VAT if an invoice hadn’t been issued. Instead, they spread the prepaid amount across the service period and paid VAT gradually. With the new rules, they are now required to pay taxes on this income much earlier.
Another potential consequence is the impact on a company’s tax status. For businesses that receive payments before delivering services, recognizing the full revenue sooner could push them past the VAT threshold. If their total recognized revenue exceeds the small-scale VAT taxpayer limit of 5 million yuan (approximately USD 720,500), they will need to switch to a general VAT taxpayer status and adopt different tax rates, noted Ge.
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