Withholding Tax in China

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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
China-Tax-Guide-2013-thmbThe 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.

45 Responses

  • Richard Oppmann says:

    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?

  • Byron Nichols says:

    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

  • GAEA Technologies India P Ltd. says:

    Will you be able to clarify a doubt regarding Withholding Tax Certificate?

  • Preeti Gupta says:

    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

  • Editor says:

    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.

  • Frances says:

    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

  • williamchin says:

    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

  • Cate Thero says:

    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

  • Rishi Sharma says:

    Do you know….Once the taxes are paid to the government in China..their is no claims or any kind of refund.

  • Avin Kohzadi says:

    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.

  • Greg says:

    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

  • Danny says:

    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

  • Veronica says:

    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

  • Veronica Tan says:

    I have read some online messages and understand there is possibilities of claiming for a tax refund in China and would like know more about this services.

    Is there a contact that I can reach to discuss the matter in more details?

    Thanks and regards,
    Veron

  • @Veron – Yes there may be possibilities to reclaim this tax. I have replied directly to you via email. Contact for such enquiries is tax@dezshira.com
    Best wishes
    Chris

  • manish says:

    Pl advise when is the withholding tax is paid by the Bank in case of depost by the Non Resident / Overseas party (on interst)? Is at the time of accrual or at the time of maturity of Deposit or on the time of remittance of maturity proceeds(including Interest earned).

    If the witholding tax is to de deducted on accrrual basis i.e. when ever the interest is accrued (say monthly but paid on maturity 12 months) Do the bank have to deduct the WHT on monthly on accrual and deposit to tax authorities even it is actually paid to depositor after 12 months or Bank has to deduct it after 12 months on maturity when it is actuall paid to depositor.

  • @Manish – Thank you for your comment. Does this relate to a personal savings plan you entered into in China as an individual? If so, under PRC tax laws interests from personal deposits are no longer taxable under individual income tax as from 2008. This is applicable for both Chinese nationals and foreigners.

    Generally speaking, where withholding taxes do apply, the withholding taxes only become payable at the time of remittance out of the country. If the amount is over USD50,000, banks are under instruction from SAFE to request for proof of related tax clearance from the sender before funds can go out.
    Hope that helps – best wishes – Chris

  • Denis says:

    We are considering Selling Software and related consulting services in China and setting up a WFOE to sell in China. On payments from the Chinese Customers to the WFOE, I don’t expect any Withholding Tax. Is this correct?
    On payments from the WFOE to the parent company Is there withholding tax when the WFOE is paying parent company invoices for;
    a) software
    b) consultancy services

    Denis

  • @Denis, you are correct.
    1) There will be no withholding tax liability from your China customers to your WFOE.
    2) There will be withholding tax applicable and deductible on invoices from your parent company to the WFOE. The procedure to remit this is as follows:
    i) Parent invoices WFOE (in foreign currency)
    ii) WFOE calculates applicable WT (be aware this can change depending upon type of service, and also potentially be reduced depending upon whether your parent company is in a country with a Double Tax Treaty with China. Ask us if you need more info on this. We also wrote about China DTA here: http://www.china-briefing.com/news/2013/07/15/double-taxation-agreements-and-your-china-investment-strategy.html
    iii) WFOE pays applicable WT and obtains tax paid receipt
    iv) WFOE takes tax paid receipt and invoice to the State Administration of Foreign Exchange or to their bank (some banks can now issue SAFE clearance directly)
    v) Remaining balance less WT is remitted in forex as specified on the invoice to the parent.

    There’s also more on calculating and filing Withholding Tax here: http://www.china-briefing.com/news/2013/06/14/calculating-and-filing-withholding-tax-in-china.html

    Best regards – Chris

  • Christeoh36@hotmail.com says:

    I wonder, those reimbursement of Travel Expenses subject to withholding tax too?

  • @Christeoh – Legitimate travel expenses are a cost and to avoid WT issues I’d bill them directly through your China entity or your parent company and not attempt to bill back from one entity to another. – Chris

  • Rodel says:

    Hi Chris Devonshire-Ellis.
    Our company in the Philippines, which has no branch office in China, provides training and consulting to a China branch (e.g. Citibank China) of a multinational company (e.g. Citibank). The China Branch of the multinational company pays us for the services we render to them and deduct a withholding tax. My questions are : 1. can we claim the tax withheld certificate as tax deduction when we prepare our income tax payable here in the Phils? 2. If not, what is the better way to set up our business – should we create a WFOE in China, so the tax withheld will be avoided? or remain as is and accept the reality that the tax withheld is an expense in doing business with China companies? Thank you.

  • @Rodel: You should check with the competent tax authority in Philippines to see if you can claim tax withheld certificate as tax deduction. The Chinese tax authority will deduct a withholding tax (dividend tax) if companies want to repatriate their profits overseas, so even if you set up a WFOE in China, types of withholding tax cannot be avoided.

    Best wishes
    Chris

  • Rodel says:

    @Chris, thanks Chris…how about if our business is in Hongkong? Is HK considered by the China Tax Authorities as a non-Chinese country? Thanks.

  • @Rodel; for all intents and purposes Hong Kong is treated as a separate jurisdiction, albeit one that is Chinese sovereign territory. This means the tax treatments and so in in Hong Kong are different than mainland China. However Hong Kong companies do enjoy some preferential tax treatments, including Withholding tax issues under the “Closer Economic Partnership Agreement” (CEPA). You may use the search function on this site to look for data on this. However there is a qualifying period to take advantage of CEPA benefits (which broadly halve WT) and newly established companies have to wait five years before these benefits kick in.
    Best regards
    Chris

  • Rodel says:

    @Chris…thanks

  • annie says:

    hi there, I have a pretty similar question as Danny please see his questions attached below:-

    1. we are also a singapore company providing consultancy services to a China establishment, we have yet to receive payment from our client yet but wonder what is the expected tax rate to be deducted from payment made to us by our client
    2. what is the 7.5% that Danny is referring to?
    3. similarly service contract for a longer period more than a year, is the withholding tax rate higher than normal?
    Thanks for your help

    Danny says:
    February 27, 2013 at 7:01 am
    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.
    – See more at: http://www.china-briefing.com/news/2010/09/22/withholding-tax-in-china.html#sthash.PIZNbUxV.dpuf

  • @Annie, the answer to this lies in two parts; firstly the type of service being provided to the China entity as the tax burden depends upon the service; these rates vary. Secondly, the WT rate may be minimized by invoking the Singapore-China Double Tax Treaty.
    You need professional assistance to answer these points. Please email our Singapore office at singapore@dezshira.com for assistance.
    Kind regards,
    Chris

  • annie says:

    Thank you.

  • Roy says:

    Hi, we are provide service to a China company and they need to withhold a tax %. They told us that if we find a tax agent to pay the tax for us, the rate will be lower than what it should be. Is this true? and is there a must for finding a tax agent to pay the tax for us? How are we able to make payment for the tax if the China company does not want to pay the tax amount for us?

  • @Rory – this is not true. It sounds like an excuse to delay paying you.
    The Chinese company must “withhold” the tax (hence the name) by deducting it from your invoice. They must take that money to the tax bureau, together with your invoice and pay the amount due, and obtain a tax paid receipt. They then take this to their bank who will arrange to notify SAFE and transfer the balance left and due to your account overseas.
    It is possible they are not familiar with this process. In which case you can ask them to contact our firm at tax@dezshira.com to explain the process (no charge).
    Otherwise they are just messing you around. It is not your responsibility to find a tax agent it is theirs to withhold the tax and pay it as they have received your money.
    Trust that clarifies the issue.
    Best wishes
    Chris

  • Roy says:

    Thank Chris for the reply. Is it a must for the China company to pay the tax for us or they can request us to make the tax payment by ourselves? If we are paying the tax in China, how do we do it.

  • @Roy – You can’t pay tax in China, you are not a company registered in China. It is the responsibility of the Chinese buyer to deduct WT from your invoice and process the payment. Its highly unusual that they don’t seem able to do this. If they wish they can contact us and we’ll walk them through the procedure. I suggest you commence this by emailing me at chris@dezshira.com and letting me know where the Chinese company is, and then I can introduce our pertinent regional office to you and them and we can get this sorted out. No charge.
    Best wishes
    Chris

  • John Carter says:

    What is the amount of tax that Chinese company withholds from UK company for services like promoting export sales in specific country outside PRC, i.e. sales agent. Any application of DTAA UK-China coming into force from January 2014?

  • @John: Being an oversea sales agent of a Chinese company could be subject to business tax or value-added tax depending on what kind of promoting service you provide. It may also depend on what kind of product you are promoting. In addition, there is corporate income tax involved which would be imposed in accordance with the China-U.K. DTA.
    For more information, please contact us directly at china@dezshira.com.

  • Patrick says:

    Hi, I am a Malaysian individual investing in H shares in Hong Kong (China mainland company listed in Hong Kong). When I get my dividend, it was deducted with 10% withholding tax. Is there any way for me to claim the 10% back from China / Hong Kong or claim it from my home country, Malaysia?

    Thanks,

  • @Patrick: This is a complicated issue and dependent upon whether you are an individual or a corporate. I explain as follows

    1. According to Guo Shui Han Fa [1994] No. 440, ” In the case of a foreign national holding B shares or overseas shares(including H shares), income received in the form of dividends (bonuses) from the enterprise within Chinese territory which issued the said B shares or overseas shares(including H shares) shall be temporarily exempted from individual income tax levies.”
    Consequently, if a Malaysian individual invested in H shares, the dividend shall not be taxed.

    2. According to Guo Shui Han Fa [2008] No.897, “Where a Chinese resident enterprise pays dividends for the year of 2008 or any year thereafter to its H-share holders which are overseas non-resident enterprises, it shall withhold the Corporate Income Tax thereon at the uniform rate of 10%.”
    Besides, as stipulated by Article 10 of the China-Malaysia DTA, “Dividends paid by a company which is a resident of China to a resident of Malaysia shall be taxed in China according to Chinese laws, but if the beneficial owner of the dividends is a resident of Malaysia the tax so charged shall not exceed 10 per cent of the gross amount of the dividends. ”

    That is to say, if the investor is a Malaysian enterprise investing in H-shares, its dividend is taxable under the China-Malaysia DTA and Chinese Law, and is subject to the 10% rate.

    I trust this clarifies your position.
    If you require further assistance please contact us at china@dezshira.com
    Best wishes
    Chris

  • Patrick says:

    Hi Chris,

    Thanks for your prompt reply. In this case, I am a Malaysian individual investing there. My investment is done by my Private Banking account with an institution in Malaysia and the taxed withheld was at 10%. If I understand your reply correctly, I shall not be taxed, am I?

    If I am not to be taxed, is there any way for me to claim the 10% withholding tax back?

    Thanks

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