Congratulations, you have just sold your product on the China market directly from your home country. Now what? Are you required to pay tax in China and how do you ensure that you remain tax-compliant in China?
Firstly, the income is considered to be China-sourced income that is derived by a non-resident enterprise without an establishment in China. So yes, you are required to pay tax in China. The tax payable should be withheld at the source, with the payer – the Chinese enterprise that remits the fund overseas – acting as the withholding agent.
The withholding tax (WHT) rate for Corporate Income Tax (CIT) rate for non-resident enterprises (NREs) in China is 20% (currently reduced to 10%). However if there is a double tax treaty in force between China and your home country that applies a lower rate, then the lower rate will prevail.
Last October, the State Administration of Taxation (SAT) released Announcement 37 on “Issues concerning the Withholding of Corporate Income Tax at Source of Non-resident Enterprises”, which replaced a series of circulars and provisions in respect of WHT on NREs, which came into effect on 1 December 2017. What did Announcement 37 change?
Record filing procedure
Previously, the WHT agent was required to complete a record filing procedure with its supervising tax authority, including registration of the relevant contract within 30 days of the contract being executed). This filing requirement has been removed unless specifically requested by the supervising tax authority or otherwise required by law.
Payment by instalments
Announcement 37 abolishes the requirement for WHT agents to conduct final clearance and settlement procedures for contracts with multiple instalment payments. Tax authority clearance was previously required at least 15 days before the final instalment payment was due to be paid.
Timing of WHT payments
Announcement 37 clarifies that a WHT obligation arises on the date of actual payment of dividends out of China. Previously the WHT obligation arose at the date on which a board decision was made to allocate profits to dividends.
Where an asset transfer consideration is to be paid in instalments, the tax law will regard the investment cost as being recovered first, followed by the disposal gains. The time that a WHT obligation arises will be deferred accordingly.
WHT settlement periods
Where the WHT agent fails to pay, Announcement 37 abolishes the requirement for the NRE to file and pay any underpaid tax within seven days of the original WHT obligation arising. The new guidance provides that the NRE can wait, without penalties, until instructed to pay by the tax authorities.
It further clarifies that where a WHT agent fails to withhold tax, then the supervising tax authorities of the WHT agents may pursue them for the unpaid tax rather than the NRE.
Announcement 37 is an example of China’s efforts to achieve greater co-operation among different tax bureaus to improve the business environment. If you have more questions on this or on any other business-related subject in China, please contact Sovereign China.
Contact our China offices here.