Senior Associate
China’s Local Surtax Reform is on the Horizon
- Strengthening the statutory basis of China’s local tax and fee system
- Possible increases in specific tax rates and tax burdens
- Uncertainty on tax incentives
On 28 August 2026, the Chinese Ministry of Finance and the State Taxation Administration published the Draft Law of the People’s Republic of China on Local Surtax for Public Comments. It proposes to consolidate the existing Urban Maintenance and Construction Tax, Education Surcharge and Local Education Surcharge into a unified local surtax.
On 28 August 2026, the Chinese Ministry of Finance and the State Taxation Administration published the Draft Law of the People’s Republic of China on Local Surtax for Public Comments (hereinafter referred to as “the Draft”). It proposes to consolidate the existing Urban Maintenance and Construction Tax (“UMCT”), Education Surcharge and Local Education Surcharge into a unified local surtax.
This reform marks another step toward strengthening the statutory basis of China’s local tax and fee system. The public comments end on 27 September 2026. The existing regime will remain in force until the new law officially takes effect. It should be noted that this reform does not introduce a new tax type or broadly increase tax burdens; instead, it carries out legislative consolidation of the long standing local tax and fee regime.
Key changes
Based on the Draft, the key proposed changes are summarized below:
| Item | Current regime (One Tax and Two Fees) | Proposed regime (Local Surtax Law) | Key differences |
| Nature of tax | UMCT, Education Surcharge and Local Education Surcharge | Consolidated into a single Local Surtax | Consolidated and elevated to a statutory tax |
| Taxpayers | Entities and individuals that pay VAT and Consumption Tax within China | No change. Applied only to domestic enterprises. Services and intangible assets sold by overseas entities to customers in China are not subject to the Local Surtax. | |
| Tax Base |
|
No change. | |
| Tax rates / Levy rates |
|
Rate range: 11% – 13%; a uniform rate will be determined for each province without further differentiation between urban, county/town and other areas. | The current differentiation by administrative area will be abolished and replaced by a uniform rate at the provincial level. The tax burden on enterprises in urban areas will remain broadly stable, while enterprises in counties/towns and other administrative areas will face an increase in tax burden. |
| Tax incentives | Various preferential policies, including reductions for small-scale VAT taxpayers and small and micro enterprises, as well as exemptions for taxpayers with monthly sales of no more than RMB 100,000. | The State Council may grant reductions or exemptions for specific industries or groups, or in response to major emergencies, subject to filing with the Standing Committee of the National People’s Congress. | Authority over preferential tax treatments is centralized to the State Council, eliminating arbitrary local‑level introduction of tax reduction and exemption measures. Whether existing general applicable preferential policies can be extended after 31 December 2027 remains to be clarified in subsequent formal supporting documents. |
| Provisions on Place of Tax Payment, Time of Tax Liability Incurrence and Withholding Agents | Consistent with the relevant provisions on Value Added Tax and Consumption Tax | No change. | |
| Filing mode | The three former surcharges shall be booked and filed separately. | Consolidated into a single tax type: one‑time accounting and one‑time tax filing. | Financial accounting and filing procedures are simplified. |
In light of the upcoming local surtax reform, enterprises should monitor regulation developments from the following practical perspectives and make timely adjustments:
Monitoring possible increases in specific tax rates and tax burdens
According to the Draft, the most notable change under the reform lies in adjustments to local surtax rates. In particular, for enterprises located in other administrative regions, the local surtax rate will increase from the current 6% to 11%, representing an increase of at least 5 percentage points.
In addition, each province will independently set its applicable tax rate within the statutory range going forward. Objective rate differentials will accordingly emerge across provinces. For groups operating across multiple provinces, local surtax should be incorporated into tax-burden assessments for location selection and investment structuring.
Against these potential changes, enterprises should closely monitor the final applicable tax rate determined by their respective province, calculate changes in their tax burden before and after the reform, and make contingency plans in advance. Meanwhile, enterprises operating across multiple regions should also assess the impact of differences in tax rates among provinces on their overall tax burden.
Uncertainty on tax incentives
Under the Draft, the authority to grant tax reductions and exemptions is centralized at the State Council level. Local governments may no longer arbitrarily introduce local surtax reduction and exemption measures. This change will curb disorderly local tax concessions that create tax-favored locations and help prevent vicious inter-regional tax competition. Nevertheless, enterprises need to assess at an early stage the potential impact on their day-to-day operations of the possible discontinuation of various time-limited local tax incentives following the formal enactment of the new law, as well as any resulting increase in their tax burden.
Furthermore, enterprises shall pay close attention to forthcoming formal supporting documents for the new law to ensure a smooth transition, particularly regarding whether currently effective general applicable reduction and exemption policies (e.g., 50% reduction in local surtaxes for VAT small scale taxpayers, small low profit enterprises and individual businesses; exemption for entities with monthly sales below RMB 100,000) will be retained under the new legislation.