Compliance
Compliance Guide: Applying the Labour Dispatch “差额征税政策” in China
New questions are emerging about how China’s labour dispatch differential taxation policy works. Here’s how dispatch agencies and client companies can stay compliant.
By NomadicTax Research Team • 5-8 min read • September 14, 2026
## What Is the Labour Dispatch Differential Taxation Policy?
As part of the new VAT framework (VAT Law and its Implementation Rules), the **Labour Dispatch Differential Taxation Policy** (劳务派遣差额征税政策) allows certain costs in labour dispatch services—mostly wages, benefits, social insurance, and housing fund—to be **deducted from the taxable base** of output VAT. This reduces the VAT burden on dispatch service providers.([chinatax.gov.cn](https://www.chinatax.gov.cn/chinatax/c102414/c5251563/content.html?utm_source=openai))
## Who Qualifies & What Conditions Apply
- The **dispatch company** must hold a valid **Labour Dispatch Operating Permit (劳务派遣经营许可证)**. Having disclosure to local Human Resources & Social Security authorities is also required if using branches under the main company.([chinatax.gov.cn](https://www.chinatax.gov.cn/chinatax/c102414/c5251563/content.html?utm_source=openai))
- The costs deductible are strictly those for wages, social insurance, housing fund and welfare provided directly to the dispatched workers. Other costs—management fees, training, overhead—are not deductible.
## Key Compliance Steps
1. **Verify Licensing & Permit**: Ensure your full organisation (main company and branches) hold necessary permit. If the branch lacks the permit or fails local registration, it cannot apply the deduction policy.([chinatax.gov.cn](https://www.chinatax.gov.cn/chinatax/c102414/c5251563/content.html?utm_source=openai))
2. **Allocate Expenses Accurately**: Maintain separate accounting for dispatched employee wages, insurance, etc. Deduct only those that fulfill criteria.
3. **Invoice and VAT Treatment**: Ensure output VAT invoices reflect taxable base correctly—with the “差额” (difference) deduction; your VAT reporting should mirror actual practice.
4. **Audit Risk & MM Practices**: Keep documentation ready in case tax authorities query whether branch qualifies. Branch-level records should show contracts, payroll, benefit contributions.
## Example
A dispatch agency in Shanghai has head office and two branches. The head office holds the permit; branch “A” has also registered with local HR/SS department; branch “B” has not. Branch A can use the differential base deduction for dispatched workers’ wages, benefits, insurance. Branch B must continue to apply full taxable amount without deductions, until it obtains the necessary permit and registration.
### Numerical Illustration
Suppose Dispatch Co earns **¥1,000,000** in services and these include **¥600,000 wages etc.** and **¥400,000 overhead**. Under standard VAT rate of say **9%**, VAT output = ¥90,000 (on full amount). Under differential policy, only **¥400,000 taxed**, so VAT = **¥36,000**, saving **¥54,000**. Huge cash flow benefit.
## Risks & Penalties
- Incorrect invoices or absence of permit = no deduction; full VAT base applies.
- Misallocation of costs or using “dummy” or inflated wages = risk of adjustment, fines.
- Noncompliance at branch level = whole entity’s policy invalidated.
## Best Practices
- Internal controls: separate accounts for dispatched employees’ compensation and benefits.
- Permit checklist: maintain copies of the dispatch permit(s), registration with local HR authorities.
- Train accounting and finance teams: VAT filing, invoicing, permit compliance.
- Seek pre-ruling or binding interpretation from local tax bureau if your structure is complex.
This policy provides large VAT savings, but only when diligently applied. Dispatch firms and client companies must ensure permits, registration, and cost allocations are robust to benefit.