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Should I pay taxes in China if I sell services?

As a general principle, China-resident enterprises are taxed on worldwide income, while non-resident enterprises are taxed on Chinese-sourced income. Therefore, even if a company is based abroad, services provided to China-based clients/buyers will still be considered by Chinese tax authorities as income generated in China. This means that VAT must be paid on the transaction.

If the service provider is based abroad, the VAT must be paid by the client/buyer in China on a withholding basis. There have been frequent cases reported of European providers receiving a small payment than expected, because of a percentage withheld by the Chinese client/buyer. Therefore, it is strongly advised to draft service contracts requiring all amounts payable by the Chinese client/buyer to be net of taxes, thus requiring them to be liable for all taxes imposed in China. Chinese clients/buyers will likely resist this approach, often recurring to threats of abandoning the negotiation: in this case, one could try to increase pricing in advance or renegotiating the deal.