Every WFOE in China starts with a decision about VAT taxpayer status, and getting it wrong has real financial consequences. A company that should register as a general taxpayer but doesn’t faces angry customers who can’t deduct the VAT on your invoices. A company that registers as a general taxpayer too early throws away the simplified compliance and lower effective rate of small-scale status.
Here’s what the choice looks like in practice.
The Difference in Five Seconds
A small-scale taxpayer pays VAT at a reduced rate — currently 3% for most industries, with temporary reductions to 1% in some periods — but cannot issue VAT invoices that buyers can deduct. A general taxpayer pays VAT at the full rate (6%, 9%, or 13% depending on the industry) and can issue deductible invoices, but also faces more complex filing requirements and stricter input credit documentation rules.
The threshold is annual revenue of RMB 5 million. Below that, you can choose small-scale status. Above that, you must register as a general taxpayer. Newly established companies can choose small-scale status at registration regardless of projected revenue, but the tax bureau can require a switch to general taxpayer if it determines the company’s actual scale warrants it.
When Small-Scale Makes Sense
If your customers are consumers or small businesses that don’t need VAT invoices for deduction purposes, small-scale status is almost always the better choice. The lower tax rate directly improves your margin, and the simplified compliance means less accounting cost and fewer filing errors.
New WFOEs that are in their first months of operation and uncertain about revenue trajectory should generally start as small-scale. It’s easier to switch up to general taxpayer status later than to switch down — switching down generally isn’t possible.
Service companies in particular can benefit from small-scale status. At a 3% rate versus the general taxpayer rate of 6%, the direct tax saving is meaningful. And unlike manufacturing or trading companies, service providers are less likely to have B2B customers demanding deductible invoices.
When General Taxpayer Is Necessary
If you sell to other businesses in China — especially larger enterprises, state-owned companies, or any entity that needs to deduct input VAT — you need general taxpayer status. Your customers will not accept an invoice they can’t deduct because it effectively increases their cost by the non-deductible portion of the VAT.
Importing and exporting almost always requires general taxpayer status. The customs VAT on imports can only be credited against output VAT for general taxpayers. If you’re a small-scale taxpayer importing goods, you pay the import VAT with no ability to offset it against sales VAT, which makes most import business models unviable.
Manufacturing companies, trading companies, and any WFOE with significant equipment purchases should plan for general taxpayer status early. The input VAT on capital equipment can be substantial, and being unable to credit it because you’re small-scale means a permanent addition to your equipment cost.
The Input Credit Calculation
For general taxpayers, the tax you actually remit is your output VAT (collected from your customers) minus your input VAT (paid to your suppliers). If your input VAT consistently exceeds your output VAT — common for export-oriented companies or companies in an investment phase with significant capital spending — you can carry the excess forward or, in some cases, claim a refund.
For small-scale taxpayers, there’s no credit mechanism at all. The full output tax goes to the tax bureau, and there’s no offset for the VAT embedded in your costs.
The break-even point where general taxpayer status becomes more advantageous depends on how much input VAT you can credibly claim. For a service company that mainly incurs salary costs, which have no input VAT, small-scale status may be permanently advantageous below the RMB 5 million threshold. For a trading company with significant cost of goods sold, general taxpayer status almost always produces a lower effective tax rate.
The Switching Process
Moving from small-scale to general taxpayer is straightforward. You apply through the tax bureau’s online system, submit some basic company information, and the conversion is usually processed within a few working days.
Timing matters. The conversion takes effect from the following month. If you apply in January, you’re general from February. Plan your invoicing accordingly — invoices issued before the conversion date can’t be reissued as general taxpayer invoices.
Once you cross the RMB 5 million annual revenue threshold, the conversion is mandatory. The tax bureau will notify you, and you typically have thirty to sixty days to complete the transition. Continuing to operate as a small-scale taxpayer beyond the threshold can result in the tax bureau recalculating your VAT liability at the general taxpayer rate, which erases any benefit from staying small-scale.
One Practical Consideration
The RMB 5 million threshold is calculated on a rolling twelve-month basis, not a calendar year. This catches some companies off guard. If you have a strong second half of the year after a slow first half, you can cross the threshold mid-year rather than at year-end. The consequence is the same — mandatory conversion — but the timing can be awkward if you haven’t prepared your accounting systems and invoicing processes for the switch.
For companies approaching the threshold, it’s worth having the general taxpayer infrastructure ready before you cross it, even if you plan to maximize the small-scale benefit for as long as possible.
