Withholding Tax in China
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 email@example.com.
The China Tax Guide: Tax, Accounting and Audit (Sixth Edition)
This edition of the China Tax Guide, updated for 2013, offers a comprehensive overview of the major taxes foreign investors are likely to encounter when establishing or operating a business in China, as well as other tax-relevant obligations. This concise, detailed, yet pragmatic guide is ideal for CFOs, compliance officers and heads of accounting who need to be able to navigate the complex tax and accounting landscape in China in order to effectively manage and strategically plan their China operations.