Withholding Corporate Income Tax in China

In China, withholding Corporate Income Tax (CIT) is applied to the following China-sourced incomes derived by non-resident enterprises without establishments in China, or to that 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, and royalties and income from the transfer of property; and
• Any other incomes subject to CIT obtained by non-resident enterprises.

The withholding CIT rate for non-tax resident enterprises in China is 20 percent (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. This means that China-sourced dividends remitted to Hong Kong are subject to a reduced withholding rate of five percent.

The tax payable on income derived by non-resident enterprises should be withheld at the source, with the payer (i.e., the Chinese enterprise who remits the fund overseas) as the withholding agent.

The formula for calculating withholding tax liability is: Tax payable = Taxable income x Tax rate

Filing procedure for withholding CIT

Where a non-resident enterprise derives China-sourced dividends, interest, rents, and royalties, or income from property transfers, it is required to file the withholding tax either by itself or by a withholding agent.

With the SAT’s Announcement on Issues Relating to Withholding Tax on China-Sourced Income of Non-resident Enterprises (SAT Announcement [2017] No.37, hereinafter Circular 37) coming into force on December 1, 2017, the filing procedure for withholding CIT was significantly clarified and revised.

According to Circular 37:

• The record-filing of the contract is no longer required.

Previously, a copy of the contract giving rise to the taxable income, along with a contract registration record form and other relevant documents, had to be submitted to the authorized tax bureau for record-fling within 30 days of signing the contract. All documentation, including those originally in a foreign language, had to be translated into Chinese. This procedure applied to each subsequent revision, supplement, or extension of the contract.

Circular 37 reduced the burden on the withholding agent for record-filing, except in limited situations provided in other specific regulations such as SAT and SAFE Announcement [2013] No.40. The competent tax authorities still have the right to request the contract from the agent.

• The additional reporting requirement for income paid by installment is canceled.

Previously, for income paid by installment, the withholding agent should, within 15 days prior to making the last payment, report to the authorized tax bureau the details of all completed payments in order to complete a tax withholding clearance.

Circular 37 canceled this reporting requirement.

• The arising time of withholding obligation is revised.

Previously, the arising time of withholding obligations on equity investment income, such as dividends bonuses, should be the day on which the distribution decision was made by the board of directors or the actual payment date, whichever is earlier.

Circular 37 clarified that the time of withholding obligation arising on equity investment income should be the actual payment date.

Further, Circular 37 added that, where income of asset transfer is paid by installments, the installments can first be treated as recovery of costs of previous investments, and the withholding CIT can be calculated and withheld upon recovery of all costs, i.e. upon receiving the last installment.

• The due date of the payment of withholding tax is relaxed.

Previously, the withholding agent had to file and pay withholding obligations to tax authorities within seven days of withholding obligations arising. And where the withholding agent failed to withhold tax or was unable to do so, non-resident enterprises should file and pay withholding tax to the tax authorities, where the income was derived within seven days from the date the payment is made by the withholding agent or from the date the payment becomes payable. If non-resident enterprises failed to pay as well, late payment interest would be imposed.

Circular 37 provided a more beneficial new rule. Where the non-resident enterprise has filed and paid tax before the tax authorities order it to make payment within a stipulated period, the enterprise shall be deemed to have paid tax on time. In this case, late payment interest will not be levied.

In addition, Circular 37 provides for greater cooperation among different tax bureaus to improve the business environment. For example, when the non-resident enterprise generates income from different tax regions, the withholding agent can choose to pay tax to just one of the relevant tax bureaus.

Moreover, Circular 37 clarifies other issues relating to the calculation of taxable income, such as the foreign exchange rule in calculation, the retrospective effect of certain rules, as well as how to calculate taxable income in equity transfer and asset transfer.