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
The withholding tax rate for non-tax resident enterprises in China is 20 percent, which is currently reduced to 10 percent.
For dividends, interests, rents, and royalty income, if the respective rate in a tax treaty is higher than 10 percent, the 10 percent rate will prevail; if the rate in the tax treaty is lower than 10 percent, then 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 five percent, where the beneficial owner directly owns more than 25 percent equity of the company that pays the dividends, unless the dividends should be regarded as business profits.
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 canceled;
- 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.
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.
To enjoy the deferral treatment, the below conditions should be satisfied:
- Direct investments by an overseas investor using distributed profits shall include equity investment activities - such as the overseas investor using distributed profits to increase capital, establish a new company, or acquire equity (between non-related parties) - but shall exclude new subscription and transfer or acquisition 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 by an overseas investor 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 an account of the equity transferor and shall not be circulated among other domestic or overseas accounts prior to making direct investments; and
- Where the profits used by an overseas investor for direct investments are paid in non-cash forms, such as in-kind and 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, or temporarily held, by other enterprises or individuals prior to making direct investments.