The Kitchen Equipment Contract: VAT, CIT and the Shareholder Loan
Yuanqi Kitchen Equipment Co. is a general VAT taxpayer in China. In 2024 it signed one contract to sell 100 commercial ovens for RMB 5.65 million, VAT inclusive, and to install them at the buyer’s site for a separately stated RMB 218,000, VAT inclusive. Yuanqi’s own employees performed the installation. It bought steel for RMB 2.26 million, VAT inclusive, obtaining a special VAT invoice; 10% of the steel was used for the employee canteen and 90% for production. It paid a bank RMB 50,000 as a penalty for early repayment of a loan, an environmental protection bureau fine of RMB 100,000, and tax late-payment surcharges of RMB 20,000. In July 2024 shareholder Zhang borrowed RMB 3 million from the company; it remained unpaid at 31 December 2024 and was not used for the company’s production or operations.
1. How should the equipment sale and installation be treated for VAT? Compute Yuanqi’s output VAT.
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Because Yuanqi sells self-produced goods and also provides installation using its own employees, the transaction must be classified carefully. Where the goods and the installation are separately accounted for, the goods are subject to VAT at 13% and the installation, as a construction service, at 9%. If they are not separately accounted for, the whole amount may be treated as a mixed sale and taxed at 13%. Here the installation price is separately stated, so the separate-treatment rule applies. Output VAT on the ovens is RMB 5.65 million ÷ 1.13 × 13% = RMB 650,000. Output VAT on installation is RMB 218,000 ÷ 1.09 × 9% = RMB 18,000. Total output VAT is RMB 668,000. If Yuanqi had failed to keep separate accounts, the total VAT-inclusive price of RMB 5.868 million would have been divided by 1.13 and taxed at 13%, producing a higher output VAT of about RMB 675,080. The difference shows why the separate accounting and separate pricing matter. The result assumes the installation is a genuine construction service and not a disguised sale of goods.
2. Compute Yuanqi’s deductible input VAT and VAT payable.
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The steel invoice is a special VAT invoice, so the input VAT is RMB 2.26 million ÷ 1.13 × 13% = RMB 260,000. However, 10% of the steel was used for the employee canteen. Steel used for employee welfare is not used for taxable sales, so the corresponding input VAT cannot be credited. The non-deductible portion is RMB 260,000 × 10% = RMB 26,000. Deductible input VAT is therefore RMB 260,000 − RMB 26,000 = RMB 234,000. If Yuanqi had already credited the full RMB 260,000, it must transfer out RMB 26,000. VAT payable is output VAT minus deductible input VAT: RMB 668,000 − RMB 234,000 = RMB 434,000. The bank penalty, environmental fine and tax late-payment surcharges do not affect VAT. The key exam point is that input VAT follows the actual use of the goods: the 90% used for production is creditable, while the 10% used for collective welfare is not.
3. For corporate income tax, which of the three payments are deductible? What are the individual income tax consequences of Zhang’s loan?
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For corporate income tax, the bank penalty of RMB 50,000 for early repayment is a contractual payment arising from financing and is generally deductible if it is genuine, related to production and business, and supported by evidence. The environmental protection bureau fine of RMB 100,000 is an administrative fine and is not deductible under Corporate Income Tax Law art. 10. The tax late-payment surcharge of RMB 20,000 is also expressly non-deductible under art. 10. For individual income tax, Zhang is a shareholder who borrowed RMB 3 million from the company and did not repay it by the end of the tax year, and the loan was not used for the company’s production or operations. Under the shareholder-loan rule, the unpaid amount is treated as a deemed dividend distribution. The company should withhold individual income tax at 20%, or RMB 600,000. The amount is not a deductible expense of the company. If the company fails to withhold, it may face withholding-agent liability, and Zhang remains liable for the tax. The loan should not be left as an interest-free receivable at year-end without tax analysis.