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By Corporate Accounting Services, Dezan Shira & Associates
Sept. 22 – In China, withholding tax is a tax levied on overseas companies providing services to China-based businesses.
For companies based outside of China, but who are supplying services to clients in China (this can include a China-based subsidiary), your invoices are in effect “China-derived income” and the Chinese tax authorities levy taxes on these amounts. These are withheld by your client in China, being deducted from your gross invoice amount. This is why many overseas companies without a legal presence in China cannot receive the total gross amount due on their invoices to the China entity.
Your client has the responsibility of passing this tax onto the tax bureau. If they do not, or do not subtract the relevant amount of tax from your invoice, then the Chinese tax bureau will pursue the local business – and not the overseas operation – for settlement. The withholding income tax rate for non-tax resident enterprises in China for passive income is 20 percent under the corporate income tax law. This was reduced to 10 percent under the detailed implantation regulations of the CIT law. From January 1, 2008, this rate shall be applied to the dividends that a non-resident company receives from a resident company, unless otherwise prescribed in the tax treaty with the relevant foreign government. If the rate in the tax treaty is higher than 10 percent, 10 percent of dividends shall be adopted according to current rules; if the rate in the tax treaty is lower than 10 percent, the rate in the tax treaty should be adopted.
China has tightened its policies and procedures regarding withholding tax from non-tax resident enterprises for their China-sourced income. Non-resident enterprises with or without establishment or place in China, and those with income not effectively connected with such establishment or place, shall pay CIT on their China-sourced income. Such income includes: income from the sales of goods; income from the provision of services; income from the transfer of property, dividends and profit distribution; income from equity investments, interests, rentals, royalties; income from donations; and any other income not included in the categories listed.
The income tax payable on such income derived by non-resident enterprises shall be withheld at source, and the payer shall be the withholding agent. The withholding agent shall withhold tax from the amount of each payment that is paid or that becomes due at the time of payment or at the time the payment falls due, which means that the withholding obligation arises when such income is remitted or when the payer accrues the amount as a cost or expense under the accrual method of accounting, and the China enterprise who remits the fund overseas shall be the withholding agent.
Calculation of tax liability: Withholding tax payable = taxable income × tax rate
For dividends, interest, rental and royalty income, the taxable amount is the gross amount remitted before deduction of any taxes, including business tax. If the withholding tax and business tax is borne by the payer, the amount of income should be grossed up to arrive at taxable income. For dividends paid overseas, no business tax is levied. For income from the transfer of property, the taxable income amount shall be the balance of the total income amount less the net value of the property. For other income, the taxable income amount shall be calculated according to the approaches as mentioned in the preceding two items.
Dezan Shira & Associates provides advice on accounting, audit, payroll and tax in China, Hong Kong, India and Vietnam. For more information or advice on withholding tax in China, please contact the firm at tax@dezshira.com.
Related Reading
The China Tax Guide (Fifth Edition)
This popular book, fully updated with all recent tax changes and amendments, details all taxes in China affecting businesses and individuals, how to calculate the amounts due, tax registration and filing procedures, tax minimization techniques, and claiming VAT rebates. It also details good financial management techniques, handling negotiations with the tax bureau and annual audit and compliance procedures.
It is not clear whether the Withholding Tax applies to travel and other expenses which are invoiced to the client, or local Chinese company. Are these expenses exempt from income that is subject to WH tax, or mustthey be “upcharged” to accomplish full reimbursement for such expenses?
We are doing business for the first time in China…The client has decucted 15% from our invoice, which they explain is the necessary tax they must pay and that we will get a certificate. Does this mean we are out the 15% or we can claim it as a decuction on our tax return
Will you be able to clarify a doubt regarding Withholding Tax Certificate?
An indian commision agent receives Commision from chinese company after deducting tax of around 5.6% . Please explain as to what kind of tax is this. whether it is direct tax or indirect tax or any other form of tax. Also whether in light of India -china DTAA , should chinese company dedut this tax.
Thanks,
Regards,
Preeti Gupta
According to the Business Tax Law of the PRC, where the service provider or recipient is located in China, the service fee will be subject to business tax, which, including the applicable surcharges (i.e. Urban Construction and Maintenance Tax and Education Surcharge), amounts to 5.6%. Therefore, the Chinese company you mentioned is required to deduct the business tax plus surcharges totaling 5.6%, before remitting the commission to the Indian agent for the service the agent provided.
Further, the taxes that fall under the DTA between India and China, do not include business tax (only income taxes are included), therefore the Chinese company is required to withhold the 5.6% tax.
I thought the WHT is 15% for Australia?
@Frances – WHT has never been levied at a 15% rate. Better check why you think it is. – Chris
I have question. Company in china as subsidiary pay dividend to Singapore company which is holding company, is the dividend subjects to withholding tax? who bear the withholding tax? and what is the rate?
Dear William, Singapore does not charge tax on dividends from an overseas subsidiary. Corporate income tax in Singapore is 17%. If you need further assistance please email our Singapore office at Singapore@dezshira.com
Thanks
Chris
For U.S. service providers working with Chinese clients in China, what is the withholding rate? Can that then be included in tax returns as Foreign Tax Withholdings? We’re planning to just gross-up our fee — is that common?
Hi Cate, withholding tax varies depending upon the service rendered. In terms of grossing up your fees, the issue you will face is that this will make you uncompetitive compared to companies providing the same service as you do, but who are licensed and have offices and pay taxes in China (because they are not subject to withholding tax as they pay business tax and profits tax instead). If you need further advice, please email us with your specific questions at tax@dezshira.com
Thanks – Chris
Do you know….Once the taxes are paid to the government in China..their is no claims or any kind of refund.
We are a company in UAE.
Previously we had service contract with a Chinese company and when they want to pay us, they deducted 5.6% as tax.
Now we signed a sales contract with them and delivered the equipment by DHL , Now they paid us 94.4% of our invoice and told us, as the equipment delivery is without documents, bank automatically deducted 5.6% as tax!
I think they are cheating. It was a sales contract not service .
Please advise us the real situation
@Rishi – there are rebates applicable in China, especially with customs and VAT, however these like all refunds need properly prepared documentation. If you require help, we can assist. Please email to china@dezshira.com.
@Avin – It is difficult to fully understand your situation without being privy to the contract and other details. Can you email us please at china@dezshira.com including details of where in China this Chinese company is, and our pertinent regional office will get back to you. Thanks – Chris
Is the Transfer of shares’ amount of a Chinese JV (51%) previously held by an Italian company to the Chinese partner subject to the withholding tax according the PRC tax law?
If yes is the rate 10%?
Thank you very much in advance for your reply.
When is the payor of interest payments required to remit the 10 percent withholding? When actually paid or when accrued?
@Greg: The “payor” has no part in the process. The 10% withholding tax is deducted from the invoice due by the Chinese client, who settles the withholding tax amount via his bank before they are permitted to convert RMB in forex and send the remaining money overseas in settlement. – Chris
Hi, we’re a Singapore company with a service contract to an establishment in China. All payments have 13.1% tax withheld. We were being told that 5.6% is Business Tax but cannot figure out what’s the other 7.5% for. Any idea what’s 7.5% for?
Also, we were told that a service contract with a tenure longer than 1 year is subjected to higher withholding tax. Would you be able to advice if this is true withholding tax rates are different for longer tenures of service contract?
Thanks in advance for your advice.
Danny we’re replied directly to you on this via email.
Best regards;
Chris
We are providing reports to a company in China. What is the amount of withholding tax that will be deducted from payment to us and do we need a Chinese local tax agent in order to get our invoice paid and what is the fees like for the tax agent?
Thank you