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Withholding tax in China is a tax applied to foreign companies operating in China with or without an entity in the country.
In short, it is a tax applied on dividends, rents, interests, royalties produced in China.
Below we explain in more detail how the withholding tax works in China and how to have a proper compliance procedure:
What is withholding tax in China?
The withholding tax on enterprises with foreign investment and foreign enterprises in China is a tax levied on the income derived from production, business operations, and other income within the territory of China.
On the basis of the original income tax for sino-foreign joint ventures and foreign enterprises, the tax categories were amended and consolidated and came into force on July 1, 1991, in accordance with the Income Tax Law of the People’s Republic of China on Enterprises with Foreign Investment and Foreign Enterprises.
The income taxpayers of foreign enterprises include Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures, and wholly foreign-owned enterprises (WFOE), which are collectively referred to as foreign-invested enterprises.
The withholding tax applies to payments of China derived income to non-resident enterprises. For such payments, a tax must be “withheld” before remittance.
The current rate of withholding tax is 10%, but note that this is a general reduction from a higher rate of 20%, and could change in the future.
Objects of income tax for enterprises with foreign investment and foreign enterprises in China
The object refers to the basis for calculating the income tax of foreign-invested enterprises and foreign enterprises, that is, the taxable income. Specifically, this includes:
- For the foreign investment enterprises and foreign companies with an establishment in China engaged in the production and management of income:
- actual contact profits (dividends);
- other income.
- For foreign enterprises without an establishment in China, these are the basis for calculation:
- Profits (dividends) obtained from enterprises in China; interest on deposits or loans, interest on bonds, interest on advances or deferred payments, etc. obtained within the People’s Republic of China;
- Rent derived from the lease of the property to a lessee in China; royalties derived from the provision of patent rights, proprietary technology, trademark rights, and copyrights for use within the territory of China;
- Gains from the transfer of property such as houses, buildings, and ancillary facilities, land use rights, etc. within the territory of China;
- Other income derived from China and subject to taxation as determined by the Ministry of Finance.
Management of taxation for foreign-invested enterprises and foreign enterprises in China
Tax authorities shall, in accordance with the provisions of the tax law and administrative authority, carry out tax collection, administration, and inspection on taxpayers who are obliged to pay the withholding tax of foreign-invested enterprises and foreign enterprises. Specifically reflected in the following aspects.
An enterprise shall, within 30 days after completing its industrial and commercial registration, complete its tax registration with the local tax authorities.
When an enterprise with foreign investment sets up or cancels a branch outside the territory of China, it shall, within 30 days from the date of establishment or cancellation, go through tax registration, alteration registration, or cancellation registration with the local tax authorities.
In case of major items such as relocation, reorganization, merger, split-up, termination, change of capital and business scope, an enterprise shall, within 30 days after the registration of change of industry and commerce or before the cancellation, go through the registration or cancellation with the local tax authorities.
The filing procedure for withholding tax is mainly applied to a non-resident enterprise’s China-sourced dividends, interests, rentals and royalties income, and income from the transfer of property.
The filing time for enterprises with foreign investment and foreign enterprises within the territory of China, for any profit or loss within the tax year, should be within the time limit for each advance payment of income tax, and it should be filed four months after the end of the year.
Where a foreign enterprise establishes two or more business organizations within the territory of China, one of the business organizations chosen by the foreign enterprise may jointly file and pay the income tax.
When an enterprise is in liquidation, it shall submit its liquidation income tax return and relevant financial and accounting statements and other materials to the local tax authorities before the cancellation of its industrial and commercial registration.
If an enterprise, for special reasons, is unable to file an income tax return and an accounting statement within the time limit prescribed in the tax law, it shall file an application within the time limit for filing and may, upon approval by the locally competent tax authorities, extend the time limit for filing.
Tax compliance procedure
The new withholding tax compliance procedure is composed of different parts, as shown below:
- Contract registration (not required from January 2018 except for onshore service contract) – 3-5 working days
- Tax assessment – 15-20 working days
- Treaty benefit application (if applicable) – 7-10 working days
- Withholding filing and payment – 2-3 working days
- Payment registration (if applicable, depending on the payment amount) – 3-5 working days
The income tax rates for foreign-invested enterprises and foreign enterprises
To encourage foreign investment, the Chinese government has formulated a series of preferential policies according to the industrial policy.
The specific contents include:
- The enterprise income tax shall be reduced at the rate of 15% for enterprises with foreign investment established in the special economic zones, foreign enterprises with institutions or places established in the special economic zones that engage in production and business operations, and enterprises with foreign investment of production established in the economic and technological development zones.
The income tax of productive foreign-invested enterprises located in coastal economic open zones and old urban areas of cities where special economic zones and economic and technological development zones are located shall be reduced at a tax rate of 24%.Enterprises with foreign investment located in coastal economic open zones, old urban areas of the cities where special economic zones and economic and technological development zones are located, or in other areas designated by the State Council and belonging to energy, communications, ports, wharves, or other projects encouraged by the State, may have their income tax levied at a reduced rate of 15%.
- The productive enterprises with foreign investment, operating for more than a decade and having profited from the start of the year, for the first and second year shall be exempted from enterprise income tax, and the enterprise income tax shall be levied by half in the third to fifth years.
- Foreign-funded enterprises engaged in agriculture, forestry, animal husbandry and located in the economically underdeveloped areas, enjoy the treatment of tax exemption or reduction in accordance with the tax law expiration, from 15% to 30%.
Withholding tax is of importance when looking at Chinese profit repatriation.
As with many taxes in China, the misunderstanding of it and missing deadlines to file the tax can cause economical losses for foreign companies operating in and outside China.
We at FDI China support everyday companies that need to deal with Chinese tax and accounting, and we manage it for them, to guarantee full local compliance.
If you want to know more about the withholding tax and how we can help your company to outsource tax and accounting, contact us to discuss further.