Foreign companies interested in distributing dividends from their China business to their investors overseas need to follow a series of tax and bank formalities, before making such payments. According to Chinese regulations, non-resident enterprises must pay the corresponding rate of Corporate Income Tax (CIT) prior to remitting any dividends.
A non-resident enterprise refers to an enterprise lawfully incorporated pursuant to the laws of a foreign country (region) that has an office or premise established in China but has no actual management functions performed in China, or an enterprise that does not have an office or premises but has income derived from or accruing in China.
Non-resident enterprises with established offices or premises in China, which obtain income from such offices or premises, must pay the standard CIT rate of 25%.
Non-resident enterprise with no established office or physical presence in China must pay CIT only on the income derived from or accrued within China. The applicable CIT rate stands at 20%, though it is presently reduced to 10%.
For dividends, interests, rents, and royalty income, if the respective rate in a tax treaty is higher than 10%, the 10% rate will prevail; if the rate in the tax treaty is lower than 10%, 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% to 5% where the beneficial owner directly owns more than 25% equity of the company that pays the dividends, unless the dividends should be regarded as business profits.
Taxable amount of income for gains from dividends
The taxable amount of income from dividends, bonus, or other returns on equity investment shall be the total amount of gains or income, encompassing all payments and associated expenses received by the non-resident enterprise from the payers.
A payer is a unit or individual directly obligated to pay relevant amounts to a non-resident enterprise in accordance with relevant laws or contracts.
CIT on dividends derived by non-resident enterprises should be withheld at the source and the payer shall be the withholding agent, according to the Chinese tax law.
The tax amount for each payment made or due shall be withheld by the withholding agent from the amount being paid or due.
The non-resident enterprise is responsible for declaring and remitting the applicable CIT to the competent tax authority in the jurisdiction where the income is generated, when the withholding agent fails to withhold or is unable to fulfill the required withholding obligation. In this circumstance, a Report Form on the Withholding of Corporate Income Tax must be completed.
The date on which the relevant tax withholding obligation occurs is the date on which the dividend, bonus, and other equity investment income are actually paid or the agreed due date of payment.
The withholding agent shall withhold the tax on the date of actual payment of the dividend income and declare and pay the withholding tax within seven days from the date of occurrence of the withholding obligation.
The tax authority in charge of the payer is responsible for collecting the CIT withheld or paid for income from dividends, bonus, or other returns on equity investment.
Where the amount paid or due to be paid by the withholding agent is in a currency other than the China Yuan (RMB), the taxable income amount of non-resident enterprise shall be based on the RMB amount converted from the foreign currency based on the RMB exchange rate published by the State on the date of withholding.
The following information or documents are necessary when filing CIT returns with tax authorities (in person or online):
Relevant contract information registration regarding the dividend payment
Information Report on Non-resident Taxpayers Claiming Treaty Benefits (for non-resident taxpayers from country or regions that have a valid tax treaty with China)
Outbound payment filing (if the amount of single payment for dividends exceeds US$50,000)
Withholding tax declaration forms
Other documents relevant to the dividend distribution such as the resolution made by the board.
Before the bank processes outbound payments, enterprises will need to provide tax payment proof to the bank.
The tax authority will ask the company to provide supporting documents for ongoing regulatory supervision, after the completion of tax-related matters and foreign exchange payments.
There are certain situations where the tax authority will execute follow-up inspections, such as:
Whether the tax obligation has occurred, but the withholding tax has not been withheld and paid in time in certain situations, such as where the Board has passed a resolution on dividends distribution yet the actual payment to overseas shareholders has not been made, or the payment has been directed to domestic affiliated enterprises or stakeholders nominated by overseas shareholders.
Whether there is unpaid tax payable amount when undistributed profits are converted into equity or reinvested directly.
Whether there is unpaid tax payable amount when retained earnings are converted into equity or reinvested directly.
Whether dividends are distributed through an implicit or disguised method (e.g., shareholders make a borrowing) to non-resident enterprises.
Whether non-resident enterprises directly exploit the preferential tax rate specified in the tax treaties before/without achieving the approval from the authorities holding approval power, which violates the Administrative Measures for Non-residents to Enjoy the Treatment of Tax Treaties (For Trial Implementation).
Whether non-resident enterprises exploit preferential policies to reach the purpose of tax avoidance by setting an agency company/conduit company in the region with the preferential tax rate specified in the tax treaties on dividends.
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.