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Preparing your leasing business in China

(June 10th, 2014)

By Manuela ReintgenECOVIS Beijing


Preparing your leasing business in China requires commitment and patience. Both lessor and lessee should be familiar with the tax and legal regulations in order to be compliant with the Chinese law.




The construction industry has two types of leasing; operational leasing and financial leasing.

An operational lease is a lease of property for an agreed upon period of time where there is never a transfer of ownership between the lender and the borrower. The following are requirements for an operational lease:

  • The minimum general assets of the foreign investors must exceed 5 million USD. The shareholder is required to provide an audit report for the past year.
  • The company should have construction machinery for leasing.
  • The leasing company should have maintenance and repair center to maintain and repair the leasing machinery, the company must have testing equipment and maintenance service staff.
  • The company must have sufficient qualified staff to fulfill the after-leasing service including, but not limited to, maintaining and repairing the machinery. The sufficient qualified stuff refers to senior management including general manager, deputy general manager, business supervisor, finance supervisor, risk management supervisor as well as operation supervisor. Managers must have specialized knowledge in relevant industries, obtain qualification and licenses issued by authorities, and more than three years’ working experience as manager in financing and leasing company or financing institution. Education qualifications depend on different job duties, though all duties require at least a bachelor degree.

The other type of leasing is the financial leasing which usually includes a financial leasing company. The lender purchases, according to the lessees required specifications, models, functions and other conditions, a tangible personal property and leases it to  the borrower. Like operational leasing, ownership belongs to the lender while the borrower has the right of use, however, unlike operational leasing the borrower has the option to take over the ownership at the residual value (asset value less lease payments) after the expiration of the lease. The requirements for financial leasing are those for operational leasing plus the following requirements:

  • The company’s registered capital shall not be less than 10 million US Dollars.
  • The company shall be staffed with corresponding specialized professionals and the senior management staff shall be professionally qualified with no less than three years’ experience in the field.

The leasing contract must be well drafted and must include the following:

  • Name of both parties
  • Type and model number of the construction equipment machinery
  • Leasing method
  • Leasing term
  • Leasing price
  • Workload and payment method of the leasing
  • Responsibilities and obligations of the two parties
  • Settlement on breach of contract and dispute

Now we will discuss the tax incentives of both types of leasing:

In the past, both a business tax (BT) and a value added tax (VAT) were applied to leasing, causing double taxation and confusion. However, since August 2013’s circular 37, only the VAT is applied.

The newest and also the present Circular 106, solves the tax burden for finance leasing with allowing the deduction of some items.

The new Circular differentiates general financial leasing and sale – lease back business. Sale- Lease Back, means a borrow buys equipment from a manufacture directly, but transfers the ownership to a lender (in most cases a financial leasing company). The lender pays the borrower the entire amount for the equipment, the borrower begins making lease payment. At the end of the lease, the borrower has the option to purchase the equipment at full price less lease payments. Circular 106 deducts the cost of leased assets, loan interest payments and binds interest payments for the leaseback model (this also applies to insurance and installation expenses and vehicle purchase tax for the non- leaseback model).

Costs can only be deducted through financial leasing though as you can see in the following case study.
A lender receives rent payments of 100.000 RMB on 500.000 RMB of equipment. The lender has installation and insurance costs of 10.000 RMB. Observe that financial leasing first deducts the costs from the rent while operational leasing doesn’t take them into consideration.

There is another tax incentive for financial leasing. When a company provides tangible personal property finance leasing services to operate financial leasing business before December 31, 2015, excess of their actual VAT over 3% shall be refunded upon collection. Let’s explore this in a case study:


A borrower has a leasing fee of 5 million RMB, purchasing fee of 3 million RMB, insurance fee of 0.02 million RMB and installation expenses of 0.015 million RMB. The VAT payable is 334.050, a tax burden of 6.68 %. The company is eligible for a refund of 184.050 RMB, the difference between the 3% rate (150.000 RMB) and the 6.68% rate (334.050 RMB).

Companies that plan to get into the leasing business also have to pay attention to the country of residence of their business. If the leasing company is resident in China it must, first of all, import the equipment from overseas and will thereby incur customs duties as well as VAT expenses of 17% of the overall import value. When the equipment is then passed on to the lessee, a further VAT of 17% of the gross rental of the equipment for operating purposes or a VAT of 17% of the net basis of the equipment for financial purposes, is borne by the lessee. Upon rental of the equipment, the leasing company can apply for a VAT refund of 3%, as mentioned above.

Leasing_business3 However, if the leasing company is not resident in China, the equipment will be both imported and used by the lessee: the import duties and VAT as well as the VAT upon rental of the equipment, for either operating or financial purposes, will be levied only on the lessee who may also have to bear the full costs, if not stated differently within the leasing contract. This is important to note because it may likely lead to a form of double taxation on the lessee in China.


If you are thinking about to start your leasing business in China don’t hesitate to contact us for further information.

With contribution by Brigitte Both (ECOVIS Beijing)

Manuela Reintgen Manuela Reintgen has been living and working in Shanghai and Beijing since 2009 and recently joined ECOVIS Beijing as Manager of the Business Development team. Having focused on foreign direct investment into China for the last few years, she advises clients on all aspects of establishing and doing business in China. Contact:
Ecovis Beijing is the trusted tax and legal advisor of several embassies and official institutions in China. It specializes in mid-sized international companies and focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our Newsletter or give us a call  +86 10-65616609 (ext 811/806)   or contact us directly via Beijing@ecovis.com
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