Chinese New Year is coming, enterprises usually hold an annual party to show gratitude to customers, boost employee morale, deepen internal communication and promote strategic sharing. For the annual party, certain tax-related risks such as venue leasing, employee’s reward, customer entertainment and other activities might occurs are as following:

1. Venue leasing
   
   According to Chinese tax law, income by hotels, resort, and other businesses premisses providing conference venues and supporting services shall pay Value Added Tax based on ‘conference and exhibition service’.
   
   Therefore, business premises forementioned shall issue invoices in ‘conference and exhibition service’ instead of ‘venue rental fee’.
   
   
2. Employee bonus
   
   According to Chinese tax law, salary income includes salary, bonus, year-end salary raises, dividend, allowance, subsidy and other income incurred from employment.
   
   Therefore, enterprise shall withhold and pay Individual Income Tax for cash bonus given to excellent staff in annual party as ‘salary income’.
   
   
3. Self-produced products distributed as prizes
   
   According to Chinese tax law, enterprises or individual business present goods of self-produced, entrusted processed or purchased to other enterprises or individuals in free shall be regarded as selling and shall pay Value Added Tax. Enterprise assets gifted to employee as reward or welfare shall be regarded as selling and shall pay Corporate Income Tax because the ownership of the assets has changed.
   
   Therefore, enterprise shall pay Value Added Tax and Corporate Income Tax if they gift self-produced products to employees as lucky draw prize in annual party.
   
   
4. Wechat red packets gave by individual
   
   According to Chinese tax law, if enterprises give presents to individual outside their enterprises in annual party, symposiums, celebrations and other activities, the fair value of the presents incurred shall pay Individual Income Tax as ‘contingent income’.
   
   Hence, employees are exempted from Individual Income Tax if they receive red packets in Wechat group from enterprises management.
   
   
5. Business entertainment
   
   According to Chinese tax law, ‘input tax deduction for domestic transportation service’ is limited to domestic passengers who sign labour contracts with enterprises and those dispatched as labour to enterprises.
   
   Therefore, if enterprises invite clients to annual party and reimburse their transportation expenses, the relevant input tax is not allowed to be offset against output tax.
   
   
6. Purchased gift present to client
   
   According to Chinese tax law, enterprises or individual business that present goods of self-produced, entrusted processed or purchased to other enterprises or individuals in free shall be regarded as selling and shall pay Value Added Tax. Enterprise’s assets gifted for business entertainment shall be regarded as selling and shall pay Corporate Income Tax. In addition, if gifts are presented to individuals outside the enterprises in annual party, symposiums, celebrations and other activities, the fair value of the presents incurred shall pay Individual Income Tax as ‘contingent income’.
   
   Therefore, enterprises shall pay Value Added Tax and Corporate Income Tax if they give out purchased gifts to clients in annual party. In the meantime, enterprise shall fulfill the obligation of withholding and payment of Individual Income Tax to ‘contingent income’.
   

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Download： China Taxation - Tax-related Issues of Annual Party [PDF]