Good News! Income from Sino-foreign Cooperative Education is Exempt from VAT!

On July 25, 2018, the State Administration of Taxation issued a Circular on Several Issues Concerning the Administration of Value-added Tax Collection for Matters Including Sino-foreign Cooperative Education (“Circular No. 42”), which clarifies whether to conduct Sino-foreign cooperative education can enjoy value-added tax exemption according to relevant policy.

 1.  Background 

According to Article 1 (8) of the Provisions on the Transitional Policies Concerning the Pilot Scheme on Levying Value-added Tax in Place of Business Tax, education services provided by schools engaged in academic education can enjoy the value-added tax exemption. However, whether the value-added tax can be exempted for Sino-foreign cooperative education conducted by the overseas and domestic academic educational institutions has not been clarified clearly in the above-mentioned provisions. For the clarification of the tax policy implementation and the convenience of taxpayers to fulfill their obligations, Circular No. 42 clarifies as follows: in the event that the overseas educational institutions cooperate with the domestic schools engaged in academic education to conduct Sino-foreign cooperative education, their income derived from the academic education services is exempt from value-added tax.

 2.  Condition and Scope of the Value-added Tax Exemption 

According to Circular No. 42, Sino-foreign cooperative education refers to the educational and teaching activities jointly organized by the overseas and domestic educational institutions in accordance with the Regulations on Sino-Foreign Cooperative Education and with Chinese citizens as main enrollment targets. The scope of the academic education, schools engaged in academic education and income derived from the academic education services shall be subject to the relevant provisions of the Provisions on the Transitional Policies Concerning the Pilot Scheme on Levying Value-added Tax in Place of Business Tax.

Specifically: 

(1)   Sino-foreign cooperative education 

Sino-foreign cooperative education mentioned in Circular No. 42 shall be the educational and teaching activities jointly organized by the overseas and domestic educational institutions with Chinese citizens as enrollment targets in accordance with the provisions of the Regulations on Sino-Foreign Cooperative Education.

(2)   Academic education

Academic education refers to the form of education that (i) the student enters into a school or other educational institution approved by the relevant state departments (ii) after passing the national education examination or other forms of enrollment prescribed by the State and (iii) obtains the certificate of education recognized by the State.

(3)   Domestic schools

The scope of domestic schools engaged in academic education shall be subject to the relevant provisions of the Provisions on the Transitional Policies Concerning the Pilot Scheme on Levying Value-added Tax in Place of Business Tax, including (i) normal schools; (ii) various schools established with approval by the education administrative department of the governments of prefectural (municipal) level and above or counterpart level and whose academic qualification is recognized by the State; (iii) technical schools and higher technical schools established with approval by the human resources and social security administrative authorities of provincial level and above; (iv) technical colleges established with approval by provincial governments. And the aforesaid schools shall include private schools providing academic education but shall exclude the educational institutions whose academic qualification is not recognized by the State, such as vocational training institutions.

(4)   Scope of the value-added tax exemption

The scope of the income derived from conducting Sino-foreign cooperative education which can enjoy the value-added tax exemption includes: tuition fee, lodging fee, textbook fee, workbook fee and examination fee which are collected based on the standard fee rates examined and approved by the relevant authorities, as well as income from meals fee collected by school canteens. Other income, such as sponsor fee, school selection fee collected by schools, shall be excluded from the scope of value-added tax exemption.

 3.  Income Gained by the Overseas Educational Institutions from Sino-foreign Cooperative Education Enjoys the Value-added Tax Exemption 

On August 1, 2018, the State Administration of Taxation issued the interpretation of Circular No. 42. The interpretation provides that the intention of Circular No. 42 is to clarify whether the income gained by the overseas educational institutions from Sino-foreign cooperative education can enjoy the value-added tax exemption or not as the current relevant provisions fail to give a clear answer. Based on Circular No. 42 and the interpretation of Circular No. 42, we can conclude that the income gained by the overseas educational institutions from Sino-foreign Cooperative Education can enjoy the value-added tax exemption.

However, in practice, the income gained by the overseas educational institutions from Sino-foreign cooperative education is always described as project fee, management fee or other similar fees. Although such fees are essentially derived from the tuition fee, text book fee and other fees from Sino-foreign cooperative education, obviously, those descriptions mentioned above are literally inconsistent with the scope of value-added tax exemption described in Circular No. 42. 

Therefore, even though the income gained by the overseas educational institutions from Sino-foreign cooperative education can be exempt from value-added tax, whether the overseas educational institutions can actually enjoy the preferential tax treatment would largely depend on if such income would fall into the scope of the value-added tax exemption specified in the Provisions on the Transitional Policies Concerning the Pilot Scheme on Levying Value-added Tax in Place of Business Tax as discussed above.

 4. Non-Independent Sino-foreign Cooperative Educational Institution and Sino-foreign Cooperative Educational Program 

On February 9, 2018, the State Administration of Taxation issued a Circular on Several Issues Concerning the Implementation of Tax Treaties (“Circular No. 11”). Circular No. 11 specifies that since April 1, 2018, a Sino-foreign cooperative educational institution without independent legal person status (“Non-Independent Institution”) and, for a Sino-foreign cooperative educational program (“Program”), the place where the educational activities are conducted, constitute the permanent establishment. It means that the overseas educational institution of the Non-Independent Institution/Program will be deemed as having the PE in China no matter how long “the employees or personnel engaged” stay in China. Circular No. 11 increases the taxation burden of the overseas educational institutions to certain extent.

However, according to Circular No. 42, in the event that the overseas educational institutions meet all the conditions in Circular No. 42, the income gained from Sino-foreign cooperative education will be free of value-added tax. In other words, Circular No. 42 reduces the taxation burden of the overseas educational institutions to some extent. The interpretation of Circular No. 42 issued by the State Administration of Taxation has also confirmed this point.