Tax Administration Clarifies Foreign Tax Credits Relating to Overseas Income

Posted by Reading Time: 2 minutes

Jan. 7 – China’s Ministry of Finance and State Administration of Taxation jointly issued Circular Caishui (2009) 125 on December 25, 2009, providing clarification on the foreign tax credit scheme (FTC) mechanism concerning overseas-sourced income for taxpayers.

This will affect expatriates whose remuneration is paid partially in their home domicile or externally from China. Based on FTC principles set out in the corporate income tax law and its implementation rules, the circular provides additional mechanisms for the timing of and reporting of overseas-sourced taxable income, calculation thereof, FTC limits, and the types of foreign companies qualifying for FTC.

The circular states that income derived by a resident company’s foreign subsidiaries without independent taxpayer status (not an independent legal person or a tax resident in the source jurisdiction) must be consolidated into the China resident company’s overseas-sourced taxable income for the year, regardless whether it is distributed in China or not.

Article 17 of the implementation rules provides that when calculating taxable income, losses incurred by a China resident company from its overseas subsidiary may not be offset against domestic profits, those losses  may be offset against the same jurisdiction’s income under different category, or be carried forward.

To determine creditable foreign taxes, in such cases where resident China companies generate income from a subsidiary in a jurisdiction with which China has signed a tax treaty, the tax exempted or reduced in that jurisdiction shall be deemed as tax actually paid and is therefore creditable under FTC guidelines.

Dividend remittance from foreign subsidiaries
The circular provides a formula for calculating foreign tax attributable under circumstances where dividends received by a China resident company from overseas subsidiaries. Indirect FTC is permitted for a resident company that holds directly or indirectly no less than 20 percent of the subsidiary’s shares. In calculating the FTC limit, the circular clarifies that the applicable CIT tax rate of 25 percent shall apply unless specific rules provide otherwise. Companies may adopt simplified measures to calculate FTC such as foreign business profits or dividends where the applicable tax rate is higher than in China. Under such circumstances, the FTC limit may be determined based upon the China rate and the taxable income derived from the jurisdiction.

Hong Kong, Taiwan and Macau
The circular takes a retroactive position for these territories backdated to January 1, 2008.

For assistance with China-overseas audit consolidation matters, please contact Sabrina Zhang, the national tax partner of Dezan Shira & Associates at

Correction, January 28, 2010
An earlier version of this article erroneously referred to foreign subsidiaries as overseas branches. Circular 125 discusses the remittance of dividends by foreign subsidiaries not branch offices.