In China, withholding tax (WHT) is levied on the income of foreign enterprises that do not have a physical establishment in China but provide services to China-based businesses. Any China-derived income arising from such a transaction between an overseas entity and a Chinese business is withheld by the China-based client, deducted from the gross income amount, and taxed by the Chinese tax authorities at a flat concessionary rate of 10 percent.
Thus, it is the responsibility of the China-based client to ensure the transfer of tax onto the tax bureau. If they fail to do so, or do not pass on the correct or relevant amount from an invoice, the local tax bureau will take up repayment with the China-based client, and not the overseas entity.
According to China’s Corporate Income Tax Law (2008), passive income of non-tax resident enterprises in China is taxed at 20 percent, though this was reduced to 10 percent in the detailed implantation regulation of the law. This rate is applied to any dividends obtained by an overseas entity from a resident company. However, rates vary under the various tax treaties that exist between China and other countries, as shown here:
China’s withholding tax policies have tightened and changed. For non-tax resident enterprises, with or without a physical presence in China, as well as those with income not effectively connected with a physical presence, their China-sourced income is subject to CIT. This includes income deriving from:
- Sales of goods;
- Provision of services;
- Transfer of property;
- Dividends and profit distribution;
- Equity investments;
- Royalties; and
Corporate income tax payable will be withheld at the source, with the payer acting as the withholding agent, who will withhold tax from the amount of each payment when it is due. Therefore, the withholding obligation arises when income is either remitted or when the payer accrues the amount as a cost or expense. Correct calculation of tax liability is as follows:
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 added up to produce the taxable income.
For dividends paid overseas, no business tax is levied. For income from the transfer of property, the taxable income amount is the balance of the total income amount minus the net value of the property. For other income, the taxable income amount can be calculated according to the formulae of the preceding two items.
Determining tax liabilities
Though it is common for overseas non-tax resident entities to provide services for clients in China, or their own subsidiaries located there, whether or not withholding tax applies to their transactions is not always clear. Even if it is certain that China-sourced income is subject to withholding tax, the correct tax base and rate still may not be apparent.
Enforcement is not uniform in China, with each case and transaction subject to the discretion of local tax authorities. The actual applicable tax rates are therefore only set once tax officials have completed a review of tax clearance documentation and have issued their final decision.
General taxation frameworks provide only a guideline, and more precise estimations can be obtained by narrowing down to the type of service activities provided by overseas entities. It is advisable that such entities obtain professional consultation when determining the nature of withholding tax for their services.
Editor’s note: This article was originally published on September 22, 2010, and has been updated to include the latest regulatory changes.
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