Double taxation is a principle whereby taxes are paid twice on the same source of income. This can happen if:
- Income is taxed on both the personal and corporate level.
- In the case of international trade, the same income source is taxed in two different countries.
The double taxation policy in China is extensive. However, relief from this dual tax can be availed
through Chinese double taxation treaties or unilateral relief policies. Most of these treaties were developed in recent years and they widely give coverage to services like IT, internet and telecommunication.
The benefits emerging from the double taxation policies can be equally utilized by both the Chinese nationals and multinational companies. Furthermore, this dual tax relief is also available to the foreign business entities that charge services to any China-based company (that is subject to a WHT).
What is a Double Taxation Agreement?
China has signed numerous dual taxation agreements in recent years, with the intention to promote foreign investments and economic integrations with overseas businesses. These taxation treaties clearly specify whether the tax deduction right belongs to the country of source or the country of residence, hence eliminating the chances of double taxation.
Important aspects of China’s Dual Taxation Agreements
The double taxation treaty rules state that:
- Certain taxes like corporate income tax, withholding tax, individual income tax, and dividend tax are not subject to double taxation.
- Companies in one jurisdiction are protected from being applied to discriminatory taxes in another region.
- The double taxation rules are in compliance with the OECD’s exchange of information provisions.
Now let’s take a look at the double taxation treaty rules on different types of taxes.
Tax Treaty China on Withholding Tax
A foreign entity is subject to withholding tax (also referred to as WHT) when it bills a Chinese entity for the provided services. Generally, WHT is around 10 to 20 percent of the charged amount and is charged to the non-resident entities as a substitute to another tax that is paid by a resident enterprise for a similar transaction.
Double taxation treaty policy, however, offers relief to the non-Chinese entities by reducing the withholding tax amount to about 50 percent. This provision is especially helpful for the multinational companies having affiliates in China. For instance, if a China-based affiliate uses any intellectual property belonging to an MNC then it will only have to pay around 10% of WHT instead of the original 20%, against the licensing fees of the used services.
Rules on Dividend Tax
As per the Chinese law, a 10% dividend tax is deducted on profit repatriation. This tax, however, is reduced by 50% under the double taxation policy.
Region-based Dual Taxation Agreements
African countries that enjoy double taxation rules include Algeria, Botswana (signed but not yet effective), Egypt, Ethiopia, Morocco, Mauritius, Nigeria, Seychelles, South Africa, Sudan, Uganda(signed but not yet effective), Zambia and Zimbabwe.
The countries in America that come under the dual taxation agreement are Barbados, Brazil, Canada, Chile, Cuba, Ecuador, Jamaica, México, Trinidad and Tobago, Venezuela, and the United States. US-China tax treaty is considered as one of the most important treaties in this geographical region.
Asia and Oceania:
Dual taxation agreements with the countries that fall under Asia and Oceania include Australia, Azerbaijan, Bahrain, Bangladesh, Brunei, Cambodia (signed but not yet effective), Georgia, India, Indonesia, Iran, Israel, Japan, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Laos, Malaysia, Mongolia, Nepal, New Zealand, Oman, Pakistan, Papua New Guinea, the Philippines, Qatar, Saudi Arabia, Singapore, Sri Lanka, Syria, Tajikistan, Thailand, Tunisia, Turkmenistan, Turkey, United Arab Emirates, and Vietnam.
Countries that benefit from double taxation treaty under this region are Albania, Armenia, Austria, Belarus, Bulgaria, Belgium, Croatia, Cyprus, Czech, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Latvia, Lithuania, Luxembourg, Macedonia, Malta (signed but not yet effective) Moldova, Norway, Sweden, Iceland, Ireland, Italy, the Netherlands, Poland, Portugal, Romania, Russia, Serbia and Montenegro, Slovakia, Slovenia, Spain, Switzerland, United Kingdom (the U.K.), Ukraine, Uzbekistan, and Bosnia and Herzegovina.
China has signed a dual taxation agreement with Taiwan, Hong Kong, and Macau. The treaty with Hong Kong prevents double taxation on Chinese individual income tax, income tax on foreign enterprises, and Hong Kong’s property taxes, salaries and profits.
Process of requesting a waiver on Double Taxation under the Treaty’s Law
Following are the recommended set of actions to claim an exemption as per the agreement for the avoidance of double taxation:
- Carefully examine the double taxation treaty and identify the provisions that your business can get benefit from.
- List the relevant treaty benefits in your business plan.
- Acquire the tax resident certification issued by the tax administration office of the country of residence.
- Get in touch with local tax authorities to understand your status under the treaties laws and complete the formal registration process.
It is to be kept in mind that Chinese taxation authorities thoroughly investigate the transactional routes of business among its foreign affiliates to eliminate the exploitation chances by any MNC to reduce its taxable income by using related party’s transactions. In order to avoid delays, it is thus recommended that a Chinese entity should clearly state its intent of application for getting double taxation relief. This strategy will save time for both the applicant and the tax administration authorities.
Updates in Double Taxation Treaties as per OECD Multilateral Instrument
China has signed an OECD Multilateral Instrument, in 2017. This policy updates most of the earlier signed double taxation treaties and consists of many small changes. One noticeable update is the introduction of an anti-abuse purpose test, which will subsequently reduce the chances of double taxation policy exploitation. Hence, it is imperative for all the businesses that are enjoying double taxation relief under the treaties principles to revisit the new updates and identify the changes (if any) to their current tax arrangements.
Cases where Dual Taxation Agreement is non-available
If the earned income belongs to a country that hasn’t signed the double taxation treaty with China, the taxpayer is entitled to a tax credit over the tax paid overseas on that income.
As per the policy, the tax credit cannot go above the otherwise payable amount. In case the tax credit exceeds the limit, it can be carried forward to a term of 5 years. An indirect tax credit is also allowed.