Since the implementation of the “Value Added Tax Law of the People’s Republic of China” and its accompanying regulations on 1 January 2026, the tax rules governing the human resources service industry have undergone a fundamental restructuring. This reform represents an upgrade across the entire chain, from business characterisation and tax calculation methods to compliance standards, aimed at shifting the industry’s focus from “tax-driven” practices back to “business substance.” Clearly distinguishing between labour dispatch, human resource outsourcing and labour outsourcing has become the cornerstone of corporate tax compliance and strategic decision-making.
This article explains what changed across the three main models, labour dispatch, human resource outsourcing and labour outsourcing and what those changes mean for companies that use these services and providers that deliver them.
The fundamental differences in legal relationships
The core differences among the three models are rooted in their legal relationship structures, which directly determine management authority, risk assumption and the logical starting point for tax treatment.
Labour dispatch
Labour dispatch involves three parties: the dispatching unit, the employing unit and the labourers. The dispatching unit establishes an employment relationship with the labourers (including contract signing, salary payment and social insurance contributions), while the employing unit obtains the management rights over the labourers. The relationship between the dispatching and employing units is governed by a civil contract.
The key characteristic of this model is the “separation of employment and usage.” According to the Labour Contract Law, labour dispatch can only be implemented for temporary, auxiliary or substitutive positions and the number of dispatched labourers used by the employing unit should not exceed 10% of its total workforce. The dispatching unit needs to possess a Labour Dispatch Business License, and operations without this qualification are prohibited.
Human resource outsourcing
The essence of human resource outsourcing is a delegated agency relationship. The employing unit (the principal) entrusts transactional tasks such as payroll processing, social insurance contributions and personnel file management to a professional agency (the agent). The employment relationship remains with the employing unit, and the outsourcing agency does not intervene in any employment management, only providing channel services. Consequently, it does not assume the responsibilities of the employer and typically must possess a Human Resource Service License or undergo registration.
Labour outsourcing
Labour outsourcing refers to a civil contract relationship between the contracting party and the contractor, where the contract focuses on “work results.” The contractor independently recruits and manages employees to complete the agreed tasks, and the contracting party cannot directly instruct or manage the contractor’s staff, only accepting the results. There is no direct legal relationship between the parties, and all employment risks are borne entirely by the contractor. Tax treatment is determined by the substantive nature of the services provided (e.g., construction, cleaning, technical services).
Core summary of tax treatment under the 2026 VAT Regulations
The implementation of the 2026 VAT Law, particularly with the issuance of the “Announcement on the Connection of VAT Preferential Policies Following the Implementation of the VAT Law” (Announcement No. 10 of 2026), has made significant adjustments and clarifications to the tax treatment of the three models. The core changes include the elimination of ambiguous simplified taxation, the strengthening of general taxation and net basis taxation rules, and strict invoicing based on business substance.
| Taxpayer type | Comparison item | Labour dispatch | Human resource outsourcing | Labour outsourcing |
|---|---|---|---|---|
| General VAT taxpayer | Old policy (Cai Shui [2016] No. 47) | Options: 1. Gross-basis general taxation: Total price as sales revenue, taxed at 6%. 2. Net-basis simplified taxation: Total price minus wages and social insurance paid as sales revenue, taxed at a 5% rate. | Options: 1. Gross-basis general taxation: Service fee as sales revenue, taxed at 6%. 2. Net-basis simplified taxation: Service fee as sales revenue (excluding wages and social insurance), taxed at a 5% rate. | Tax category determined by the substantive nature of the services provided, applying the corresponding tax rate (e.g., construction services at 9%, modern services at 6%, processing services at 13%) with gross-basis taxation and no special net-basis policies. |
| New policy (Announcement No. 10 of 2026) | Single model: 6% net-basis general taxation. Sales revenue = Total price – wages, benefits, social insurance and housing provident fund paid to employees by the employing unit. A Labour Dispatch Business License is required for net-basis deduction. | Elimination of net-basis taxation, replaced by 6% Gross-basis general taxation. Sales revenue = Actual service fee received. Wages and social insurance amounts cannot be included in sales revenue or invoiced with VAT special invoices. | Rules remain unchanged. Tax categories continue to be determined by business substance, with corresponding gross-basis taxation applied. Invoicing accurately reflects the business content (e.g., “Software Development Service Fee,” “Construction Services”) rather than broadly issuing “Labour Fees.” | |
| Deductible input VAT | Compliant input VAT corresponding to the net-basis portion (management fee) can be deducted normally. Input VAT corresponding to vouchers (e.g., wage payment records) used for net-basis deductions cannot be deducted. | Compliant input VAT corresponding to the service fee can be deducted normally. | Input VAT corresponding to business substance can be deducted normally. | |
| Invoicing rules (core) | Must issue “one invoice for net-basis taxation”: On the same invoice, list the total inclusive sales revenue and the deducted amount, with tax calculated based on the net-basis. | Only issue VAT invoices for the service fee portion (special or general invoices). Wages and social insurance payments cannot be invoiced and must be substantiated with payroll and payment records. | Issue gross VAT invoices according to the actual business tax category and applicable tax rate. | |
| Small-scale VAT taxpayer | Old policy (Cai Shui [2016] No. 47) | Options:
| Options:
| Tax determined based on business substance, applying a 3% rate for Gross-basis taxation. |
| New policy (Announcement No. 10 of 2026) | Elimination of net-basis taxation, replaced by Gross-basis taxation. A 3% rate applies (reduced to a 1% rate until December 31, 2027). | Elimination of net-basis taxation, replaced by Gross-basis taxation. A 3% rate applies (reduced to a 1% rate until December 31, 2027). | Rules remain unchanged, applying the appropriate tax rate based on business substance (reduced to 1% until the end of 2027) for Gross-basis taxation. | |
| Invoicing rules | Issue VAT invoices at the Gross-basis amount (including wages and social insurance) with a tax rate of 1% (or 3%). | Only issue VAT invoices at the tax rate of 1% (or 3%) for the service fee portion. Wages and social insurance payments cannot be invoiced. | Issue VAT invoices at the tax rate of 1% (or 3%) according to the actual business tax category. |
Interpretation of core changes in the new regulations
Labour dispatch
The option for general taxpayers to use 5% simplified taxation has been eliminated, now standardised to 6% net-basis general taxation. This means that on one hand, it allows for the deduction of costs paid, while on the other, the input tax corresponding to management fees (such as rent and utilities) can be deducted, optimising the tax burden structure. However, invoicing must adhere to the “one invoice system,” and splitting is strictly prohibited. Otherwise, downstream deductions and pre-tax deductions may face risks.
Human resource outsourcing
The concept of net-basis taxation has been completely abolished. Regulations clarify its nature as “brokerage and agency,” where wages and social insurance collected and paid are considered non-taxable items, naturally excluded from sales revenue, rather than being included and then deducted. Therefore, the service provider issues a 6% invoice only for the service fee, and the principal can deduct expenses based on wage payment vouchers, simplifying the process.
Labour outsourcing
Tax treatment is entirely based on “looking at the task, not the person.” The tax rate depends on the business substance (e.g., construction at 9%, modern services at 6%, processing at 13%), and it is strictly prohibited to apply the 6% tax category for “human resource services” to all outsourcing invoices. Otherwise, this would constitute an error in applicable tax rates, posing a risk of issuing false invoices.
Direct action guidelines for market participants
The 2026 changes affect each party in the chain differently. The guidance below sets out the practical steps for employing units, dispatch providers and outsourcing agencies to align their contracts, invoicing and internal processes with the new rules before the changes take full effect.
For employing units/contracting parties
Clearly define management authority
This is the first principle for selecting a model and controlling risks. If direct management of employees is required, choose labour dispatch and ensure compliance with position and ratio regulations. If merely seeking deliverables, maintain a strict non-interference policy regarding the contractor’s employee management, with clear standards for deliverable acceptance in the contract.
Carefully review partner qualifications
Prior to collaboration, verify the counterpart’s Labour Dispatch Business Licence or Human Resource Service Licence. For labour outsourcing, review the business qualifications necessary for fulfilling the contract (e.g., construction qualifications).
Obtain compliant invoices and accurately deduct
- For labour dispatch services, obtain a special invoice indicating the deduction amount for “net-basis taxation.”
- For human resource outsourcing services, obtain special invoices solely for the service fee, with payment vouchers for wages and social insurance.
- For labour outsourcing services, ensure that the invoice items strictly correspond to the business substance.
Conduct comprehensive cost assessments
When making decisions, comprehensively compare direct costs, potential risk costs, tax costs (differences in VAT deductions, impacts on corporate income tax deductions) and management efficiency under different models.
For labour dispatch units
Adhere to compliance standards
Ensure that dispatched positions meet the “three characteristics” requirements and assist employing units in complying with the 10% workforce ratio limit.
Assume full responsibilities as the employer
Legally sign labour contracts with employees, pay social insurance and withhold individual income tax.
Accurately implement tax treatment and invoicing
General taxpayers must utilise the 6% net-basis general taxation method and correctly issue “one invoice” net-basis invoices through their systems.
For human resource outsourcing service providers
Clearly define role and avoid overstepping
Strictly limit your role to “agency” and refrain from participating in the client’s employee management. Contract terms should avoid any agreements on management authority.
Standardise financial practices and invoicing
Record wages and social insurance collected and paid as accounts payable. Do not issue VAT invoices for these amounts, but only for the service fee portion at the 6% rate.
Enhance data service capabilities
Core competitiveness lies in the accuracy, efficiency and data security of payroll calculations, tax filings and social insurance processing to win clients.
For individual labourers
Identify the contracting party
The company that signs the labour contract is the legal employer and is responsible for final wage payments and social insurance contributions.
Clarify daily management authority
The individual responsible for the daily attendance, task assignments and evaluations is the actual management party. In case of disputes, both the contracting party and the management party may bear responsibility.
Beware of “faux outsourcing” traps
If the contracting company claims to be “outsourcing,” but you are actually managed by another company, retain evidence such as work arrangements and attendance records to prevent being caught in a blame game.
Conclusion
The 2026 VAT reform brings the tax treatment of human resource services closer to the economic reality of each arrangement. Labour dispatch now follows a single net-basis general taxation method at 6%. Human resource outsourcing loses its net-basis option entirely, with wages and social insurance excluded from sales revenue rather than deducted from it. Labour outsourcing continues to be taxed according to the substance of the work delivered.
For companies using these services, the practical effect is a tighter link between contract structure, invoicing and tax position. Arrangements that rely on labels rather than substance carry more risk than they did before. For service providers, the changes affect how revenue is recorded, how invoices are issued and what qualifications are needed to apply certain tax treatments. Acclime’s China team advises on HR compliance and payroll structuring across all three models.
