Getting Paid from China – Procedural and Tax Implications

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Op-Ed Commentary: Chris Devonshire-Ellis

Jul. 31 – As increasing numbers of international businesses are now looking to sell products and services to the emerging China consumer market, in this article we examine the procedures for getting paid. It is not as simple as sending an invoice and expecting a wire transfer; China employs currency controls and this makes the procedural aspect a vital component when evaluating the administration aspect of payment. Additionally, even though an international business may not be extant in China, there may well be China tax implications to consider that may be required to be deducted from your invoice before payment can be made. On top of this, mitigation against such taxes may be obtained in part through the use of applicable double tax treaties (DTAs). International businesses should be aware of all these issues prior to committing to selling goods and services to China and expecting payment.

The basic check-list to follow when understanding the payment procedures is as follows:

  • What is the payment administration process in China?
  • Are withholding taxes applicable to my invoice? If so, how much are these?
  • If withholding tax deductions apply, what relief can I claim through the use of DTA?

We can answer these issues as follows:

Payment Administration Processes in China
As mentioned, China has currency controls in place and the RMB is not fully convertible. This means that upon receiving an invoice from an overseas supplier of goods and services, the Chinese company must go through several approval processes in order to effect payment to you. Because of this, delays can occur in getting payment made, however it is also useful to know exactly what the procedures are in order to minimize the receivables impact. In short, if your Chinese customer knows that you know the Chinese system – he’s more likely to remit on time.

Step One – Invoice Assessment
The simple matter here is distinguishing between goods and services. Non-resident enterprises sourcing goods from China do not need to be concerned with paying taxes in China. The various taxes (e.g. value-added tax, stamp duty, consumption tax and customs duty) that apply to the Chinese party importing the goods are borne and paid directly by the importer in China, which means that non-resident companies exporting the goods are not liable for these taxes.

On the other hand, non-resident companies providing services to clients in China are subject to various taxes (discussed in Step Two below).

Accordingly, if delivering both goods and services to a client in China, e.g. when selling equipment and at the same time providing after-sale services such as installation and supervision in China, it is important to clearly separate revenue received from each category. If the service fee is not specified in the sales contract or the fee is not deemed to be reasonable, Chinese tax authorities will refer to the pricing standard in same or similar service and adjust the fee. Where such a reference is not available, the tax authorities may deem the service income to be no less than 10 percent of the total contract amount.

Step Two –Tax Calculation

Provision of Services
Non-resident companies providing services to clients in China are subject to the following taxes:

  • Business tax (BT) and other surcharges (e.g., urban construction and maintenance tax (UCMT) and education surcharges (ES)): Foreign contractors with or without operating organizations in China are subject to BT when they provide taxable services (e.g. communication, transport, construction, finance and insurance, telecoms, culture, entertainment and service industries) to entities in China. BT rate ranges from 3-20 percent (but predominantly 5 percent). Generally, UCMT, ES and LES will add an additional 12 percent to the base tax percentage. For example, if BT is 5 percent, UCMT and ES would usually increase the base tax percentage to 5.6 percent. Under the current VAT reform in China, if the service provided falls under VAT taxable services in the pilot cities, local tax bureaus may apply VAT and other surcharges to the services.
  • Corporate income tax (CIT): The business profit of a non-resident company is subject to a 25 percent CIT in China if it has a permanent establishment (PE) in China and the business profit is derived from the PE.
  • Individual Income Tax (IIT) (where the non-resident enterprise is deemed to have a PE in China): Once a PE is established, all employees sent to China to work for the PE from overseas will be liable to IIT in China, as they will automatically assumed to be receiving China-derived Income.

Passive Income

For non-resident enterprises receiving passive income (i.e., dividends, bonuses, other equity investment gains, interests, rentals, royalties, transfer of property) from China, they are subject to business tax (or VAT, depending on the nature of the income and the local tax authority’s determination) and surcharges, as well as withholding tax.

The withholding income tax rate for non-tax resident enterprises in China for passive income is 20 percent under the CIT law. This was reduced to 10 percent under the detailed implementation regulations of the CIT law applied to passive income. For countries that have signed tax treaties with China, such as Hong Kong, rates differ.

Step Three –Tax Payment
Your Chinese buyer needs to process your invoice by presenting it for tax assessment to the local tax bureau. They will assess whether any taxes are due and deductible from the invoice to be paid to you. Your Chinese buyer needs to pay any amount due on your behalf. When the tax portion is paid, the tax bureau will then issue either a tax paid certificate, or a tax cleared (if no taxes are due) certificate to your Chinese buyer.

Step Four – Currency Conversion and Transfer
Foreign exchange in China is under the supervision of the State Administration of Foreign Exchange (SAFE). SAFE has designed a policy on the requirements that should be fulfilled before conversion and remittance of foreign currency can take place. Banks are required to follow the rules laid out by SAFE and review all the required supporting documents such as contracts, invoices and tax clearance/exemption certificates, before converting RMB into the appropriate foreign currency for settlement of overseas invoices.  For special types of payments, SAFE approval may be required. The conversion rate will be the average exchange rate or an exchange rate within the permissible range determined by the People’s Bank of China at that time.

In order for banks to approve overseas payments, the transferring party must present various documents to the bank. In the case of remitting service fees, the documents required include the service contract, fapiao (invoice) and tax receipt. When remitting dividends and bonuses, the documents required include an audit report issued by an accounting firm on the annual dividend and bonus situation, a board resolution on distribution of the dividends and bonuses. For amounts of US$30,000 and more, a tax clearance certificate showing clearances from the local and state tax bureaus need to be presented to the bank before the bank will process the transfer.

China’s banking system is somewhat tardy, and even then payment may not arrive for another five days, less applicable bank charges of course.

International businesses seeking to do business with China must understand these processes in full in order to both expedite payment and ensure the system is not used to fool you. Further information concerning credit checks on Chinese companies can be found by clicking here, and information concerning the double tax treaties China has with other countries may be found here.

Eunice Ku and Sabrina Zhang from Dezan Shira & Associates provided additional research for this article.

Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – 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.

Dezan Shira & Associates can assist with evaluating administration, procedural, tax liabilities and DTA applicability for international businesses selling goods and services to China. For further details or to contact the firm, please email china@dezshira.com, visit www.dezshira.com, or download the company brochure.

You can stay up to date with the latest business and investment trends across China by subscribing to The China Advantage, our complimentary update service featuring news, commentary, guides, and multimedia resources.

Related Reading

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Asia Briefing, in cooperation with its parent firm Dezan Shira & Associates, has just released this 40-page report introducing everything that a foreign investor should be familiar with when establishing and operating a business in China.

China Reforms Foreign Exchange Administration for Trade in Goods

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18 thoughts on “Getting Paid from China – Procedural and Tax Implications

    I may add that concerning having a PE in China, this distinction is made by the Chinese tax authorities, not the establishment itself. If a foreign company for example advertises itself as providing services in China, it can be deemed to be an effective PE even if no legal presence has been established. Back taxes can be demanded for “China Derived” income and visiting personnel held in China to establish any financial liability. This is especially true of countries, such as the US and some EU nations that cooperate with China over sharing tax income details. Certain service providers to China who are not effectively registered or licensed to operate in China should especially take note of the likelihood of triggering PE status and the back tax and penalty obligations that may arise. If readers feel they may be close to attracting attention as regards their activities in China we urge them to take professional advise in this matter; it is expected given the current economic climate that China will start to clamp down on foreign businesses that promote themselves as providing services in China, and then evade withholding tax on the China derived income derived from doing so. – CDE

    Mr. Krullebol says:

    This is what I call a China Law Blog! Well researched, clearly written and to the point!

    – Note to Marius who commented here – yes, I agree, and thanks for your praise. Certain law blogs do gossip, questions and opinionated pieces from posting from overseas
    (and about 50% of the time get it wrong), but if you want to know the real deal about China law and tax, people come here. But we’re not in the habit of publically discussing other blogs, especially sub-standard ones, so we took the reference you made to that particular blog down. We’re not in the business of creating scandals or public spats with other China law blogs. China Briefing deals with the facts. Thanks – Chris

    masscorptax says:

    Many thanks for sharing such a wonderful information with us.Thanks for sharing it with us.

    Steven Willett says:

    Very informative. Are there any exemptions to the Business Tax (BT) or the withholding tax if the Chinese customer/buyer for purchase of equipment from a non-resident enterprise is the Chinese government or one of its agencies?

    @Steven – Chinese SOEs have to follow the same tax rules as everybody else, so no.
    Thanks – Chris

    Mickael says:

    Does the BT applies to HK limited companies selling services (travels) to individuals (not companies)?

    @Mickael; Generally speaking Hong Kong companies are treated as a foreign entity when it comes to China and issues such as withholding tax and business tax obligations remain if you are not based in mainland China. This is because the tax regimes are completely seperate and very different. Hong Kong companies do enjoy some benefits under the CEPA
    (Closer Economic Partnership Agreement) status it has with mainland China as it is part of the same sovereignity, however these require qualifying periods – typically five years of operational history – before they kick in. For more info please email our Hong Kong office directly at hongkong@dezshira.com
    Best regards – Chris

    Emmanuel Vinnie says:

    This is well researched and delivered. Please if I aid a Chinese manufacturer to get sales in my country and I am to receive my sales commission from the Chinese company, is my commission subject to tax? If so, what percent please? Thank you

    China Briefing says:

    Hello Emmanuel,

    Thank you for your inquiry. Please contact our international tax planning team at http://www.dezshira.com/services/international-tax-planning for more information on tax liabilities.

    Veeren says:

    We have raised an Invoice of consultancy services (consultancy charges on sales) to china. Invoice raised by us from India. But china customer deducted WHT, VAT and Secondary VAT from our payment. My question is VAT and Secondary VAT is a local tax to china and has to be borne by Chinese customer only but they have deducted from our payment is this correct? Please advise.

    China Briefing says:

    Hello Veeren,

    At first glance, this taxation appears normal. However, it could depend on factors such as contract structure. Please contact our tax specialists for more information: http://www.dezshira.com/services/international-tax-planning

    Joseph Lau says:

    I have a customer outside of China that bought services that was performed in China. Should the customer outside of China be levied the 6% VAT on the invoice from China, or should it be excluded from the invoice?

    China Briefing says:

    Hello Joseph,

    VAT treatment of cross-border services performed in China depend on the nature of the service in question and other conditions. Some cross-border services benefit from zero VAT rates or VAT exemptions. For more information, please email us at china@dezshira.com or contact our international tax specialists here: http://www.dezshira.com/services/international-tax

    Mark Hertzberg says:

    I am awaiting a one-time payment from a Chinese publishing house that is purchasing the rights to publish my book. Their bank ostensibly now wants my passport number and date of birth (they have backed off asking for a copy of my passport). Is this a normal request. I would thank my bank account numbers, etc. should suffice.

    China Briefing says:

    Hello,

    Thank you for your inquiry. Please contact our legal experts for advisory on your situation: https://www.dezshira.com/services/legal-financial-due-diligence

    Cesar Farias says:

    Hi, I am suppossed to collect a commission from a Chinese Seller in Shandong Province. How much tax will they deduct from my invoice?

    Thanks

    Cesar Farias

    Melissa Cyrill says:

    Hello,
    Thank you for your query.
    The tax would be different based on the products or services you provide, your business operations in China, as well as whether the income relates to your business operations in China, etc. Please contact our tax specialist for further advice https://www.dezshira.com/services/tax#CTA_form

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