Applicability of withholding tax
Withholding tax is applied to the following China-sourced incomes derived by non-resident enterprises without establishments in China or to the incomes derived by non-resident enterprises with establishments in China but whose income is not related to these establishments:
- Dividends, bonuses, and other equity investment proceeds;
- Interests, rents, royalties, and income from the transfer of property; and
- Any other income subject to corporate income tax obtained by non-resident enterprises.
Withholding tax rates
Non-TREs without establishments or places of business in China are subject to a withholding tax (WHT) at 10 percent on gross income from dividends, interest, lease of property, royalties, and other China-source passive income, unless reduced under a tax treaty. The statutory rate under domestic law is 20 percent, but this has been reduced to 10 percent under State Council circulars that remain in continuous extension — meaning 10 percent is the rate practitioners actually apply in 2026.
For dividends, interests, rents, and royalty income, if the respective rate in a tax treaty is lower than 10 percent, the treaty rate applies. For example, Hong Kong's double tax agreement with China reduces the withholding tax rate on dividends to 5 percent where the shareholder directly owns 25 percent or more of the paying company. Similarly, Singapore and the United Kingdom also benefit from a 5 percent treaty rate on dividends at the same 25 percent shareholding threshold. Where a treaty rate is higher than 10 percent, the domestic 10 percent rate will prevail.
Currently, Mainland China has signed bilateral double tax agreements (DTAs) with more than 100 countries and regions. These treaties typically offer more favourable arrangements for withholding tax rates on passive income — dividends can be reduced to 5 percent or lower where the recipient meets certain shareholding ratios; interest rates can be reduced to 8 percent, 7 percent or lower; and royalties can be reduced to 7 percent, 6 percent or lower.
The tax payable on income derived by non-resident enterprises is withheld at source, with the payer (i.e., the Chinese enterprise remitting funds overseas) acting as the withholding agent.
The formula for calculating withholding tax liability:
TAX PAYABLE = TAXABLE INCOME x TAX RATE
Filing procedure for withholding tax
Where a non-resident enterprise derives China-sourced dividends, interest, rents, royalties, or income from property transfers, it is required to file the withholding tax either by itself or by a withholding agent.
The filing procedure for withholding tax was significantly clarified and revised according to Circular 37(2017):
- The record-filing of the contract is no longer required;
- The additional reporting requirement for income paid by installment is cancelled;
- The arising time of withholding obligation is revised: Circular 37 clarified that the time of withholding obligation arising on equity investment income should be the actual payment date; and
- The due date of the payment of withholding tax is relaxed.
Starting from the 2020 tax year, non-resident taxpayers are entitled to claim treaty benefits on a self-assessment basis. Taxpayers and withholding agents must retain relevant documentation, including a tax residency certificate issued by the competent authority of the other contracting party.
Tax authorities may conduct follow-up administration and request non-resident taxpayers or withholding agents to submit documentation and other relevant information. Misuse or abuse of tax treaties will result in retroactive payment of taxes plus late-payment surcharges.
To actually apply a treaty rate, you need a tax-residency certificate from the recipient's tax authority and must file the treaty-benefit claim with the Chinese paying agent before the dividend goes out. Additionally, a tax-clearance certificate from the Chinese tax bureau is required to remit the post-tax dividend through SAFE (foreign exchange control).
Withholding tax deferral for foreign investment in China
Foreign investors are now subject to more relaxed criteria when applying for the withholding tax deferral system.
If a non-TRE shareholder uses dividends distributed from a China tax resident enterprise (TRE) to make direct investment into China or acquire a China TRE from third parties, the non-TRE shareholder is eligible for WHT deferral treatment on the dividends, provided that certain conditions are met. The non-TRE shareholder shall report and settle the deferred tax if it later recoups the investment through equity transfer, equity buyback, liquidation of the China TRE, etc.
To enjoy the deferral treatment, the below conditions should be satisfied:
- Direct investments using distributed profits shall include equity investment activities — such as using distributed profits to increase capital, establish a new company, or acquire equity (between non-related parties) — but shall exclude new subscriptions and transfers or acquisitions of shares in listed companies (except for eligible strategic investments);
- The profits distributed to an overseas investor fall under equity investment gains, such as dividends and bonuses arising from retained earnings actually realized by a resident enterprise in China and actually distributed to the investor;
- Where the profits used for direct investments are paid in cash, the relevant monies shall be transferred directly from the profit-distributing enterprise's account to an account of the investee enterprise or the equity transferor, and shall not be circulated among other domestic or overseas accounts prior to making direct investments; and
- Where the profits used for direct investments are paid in non-cash forms — such as in-kind or negotiable securities — the relevant asset ownership shall be transferred directly from the profit-distributing enterprise to the investee enterprise or the equity transferor, and shall not be held on behalf of, or temporarily held by, other enterprises or individuals prior to making direct investments.
In February 2025, the State Taxation Administration reported that a total of CNY162 billion was reinvested in China in 2024 as a result of the tax deferral policy.
In June 2025, China introduced a new tax credit policy for eligible reinvestment, effective from 1 January 2025 to 31 December 2028. Qualified foreign investors will be granted a calculated amount of tax credit, which can be used to offset future withholding tax liabilities on income from the same distributing subsidiary. With careful structuring, foreign investors may benefit from both the deferral and credit policies, potentially achieving full exemption from withholding tax on distributed profits.
However, the eligibility conditions for the two incentives differ. For example, the tax credit policy requires a minimum five-year holding period in respect of the reinvestment. Failure to satisfy the holding period requirement may result in the forfeiture or adjustment of the previously claimed tax credit, meaning retroactive payment of withholding taxes plus late-payment surcharges.
