Calculating and Filing Withholding Tax in China

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Jun. 14 – In China, withholding tax is applied to China-sourced income derived by non-resident enterprises, including dividends, bonuses and other equity investment proceeds; interests, rentals and royalties and income from the transfer of property; and any other income subject to corporate income tax obtained by non-resident enterprises.

The tax payable on income derived by non-resident enterprises should be withheld at source, with the payer (i.e. the Chinese enterprise who remits the fund overseas) as the withholding agent.

The withholding income tax rate for non-tax resident enterprises in China is 20 percent (currently reduced to 10 percent). For dividends, interests, rentals and royalties income, if the respective rate in a tax treaty is higher than 10 percent, the 10 percent rate will be adopted; if the rate in the tax treaty is lower than 10 percent, the rate in the tax treaty should be adopted.

For example, Hong Kong’s double tax agreement with China reduces the withholding tax rate on dividends from 10 percent to 5 percent. Readers interested in finding out the double taxation status between their country and China, and the applicable withholding tax rates within such treaties, may contact the tax experts at Dezan Shira & Associates via email: china@dezshira.com.

Also note that a 5 percent business tax (BT) or 6 percent value-added tax (VAT) is applied to interests and royalties remitted from China and should be withheld by the payer.

Calculation of Withholding Tax Liability:

  • Tax payable = Taxable income × Tax rate

With respect to dividends, interest, rentals and royalties income, the taxable amount is the gross amount remitted before deduction of any taxes, including BT. If the withholding tax and BT are borne by the payer, the income amount should still be grossed up to arrive at the taxable income.

For non-resident enterprises falling under the scope of the current VAT pilot reform, and which receive passive income subject to VAT, the taxable income should be the gross income net of VAT.

For income from the transfer of property, the taxable income is the balance of the total income less the net value of the property.

Filing Procedures for Withholding Tax

The filing procedure for withholding tax is mainly applied to a non-resident enterprise’s China-sourced dividends, interests, rentals and royalties income, and income from the transfer of property.

A copy of the contract giving rise to the taxable income, along with a contract registration record form and other relevant documents, must be submitted to the in-charge tax bureau within 30 days of signing the contract. All documentation, including those originally in a foreign language, must be translated into Chinese. This procedure applies to each subsequent revision, supplementation or extension of the contract.

Within seven days from the payment date stated in the contract, the withholding agent should pay the amount withheld to the state treasury and submit the withholding return to local tax authorities.

If the income is paid by installment, the withholding agent should, within 15 days prior to making the last payment, report to the tax bureau in charge the details of all payments already made in order to complete a tax withholding clearance.

The China withholding agent should maintain books and records for taxes withheld and a file of the relevant contracts, which will be subject to inspection by the relevant tax bureaus.

If the withholding agent fails to fulfill its obligation to withhold tax, non-resident enterprises should file and pay withholding tax to the local tax authorities where the income is derived from within seven days of the due date for tax filing and payment.

China-Tax-Guide-2013-thmbPortions of this article came from “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.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email china@dezshira.com, visit www.dezshira.com, or download the company brochure.

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