Withholding Tax in China

Navigating the complexities of withholding tax in China is essential for non-resident enterprises engaging in business within the country. This guide provides an in-depth overview of the applicability, rates, filing procedures, and deferral options for withholding tax in China. Understanding these regulations is crucial for ensuring compliance and optimising tax obligations, whether you are a foreign investor or a business entity.

Applicability of Withholding Tax

Withholding tax in China applies to various types of China-sourced income derived by non-resident enterprises, regardless of whether they have establishments in China. Specifically, withholding tax applies to:

• Dividends, bonuses, and other equity investment proceeds

• Interest, rents, royalties, and income from the transfer of property

• Any other income subject to corporate income tax obtained by non-resident enterprises
  

Withholding Tax Rates

The statutory withholding tax rate for non-tax resident enterprises in China is 20%, currently reduced to 10% under the Implementation Regulations to the Enterprise Income Tax (EIT) Law.

Income Type	Standard Rate	Reduced Rate (under EIT Law)	Potential Lower Rate (under Tax Treaties)
Dividends, Interest, Rents, Royalties	20%	10%	As low as 5%

Example: Under the double tax agreement between China and Hong Kong, the withholding tax rate on dividends is reduced to 5% for beneficial owners holding more than 25% equity in the paying company.

Formula for Calculating Withholding Tax Liability:

TAX PAYABLE=TAXABLE INCOME×TAX RATE\text{TAX PAYABLE} = \text{TAXABLE INCOME} \times \text{TAX RATE}TAX PAYABLE=TAXABLE INCOME×TAX RATE

Filing Procedure for Withholding Tax

Non-resident enterprises receiving China-sourced dividends, interest, rents, royalties, or income from property transfers must file the withholding tax through a withholding agent. Key revisions under Circular 37 (2017) include:

• Elimination of Contract Record-Filing: The requirement to file the contract has been removed.

• Cancellation of Installment Reporting: The additional reporting requirement for installment payments is no longer necessary.

• Revised Withholding Obligation Timing: The time of withholding obligation for equity investment income is now the actual payment date.

• Relaxed Payment Due Date: The due date for payment of withholding tax has been extended.
  

Withholding Tax Deferral for Foreign Investment

Foreign investors can benefit from a more relaxed withholding tax deferral system if certain conditions are met:

Conditions for Withholding Tax Deferral	Description
Direct Investments	Involves equity investments such as increasing capital, establishing a new company, or acquiring equity (between non-related parties). Excludes new subscriptions and transfers or acquisitions of shares in listed companies unless they qualify as strategic investments.
Equity Investment Gains	Profits distributed to an overseas investor must be equity investment gains, such as dividends and bonuses from retained earnings realised by a resident enterprise in China.
Cash Payments	When paid in cash, profits must be transferred directly from the profit-distributing enterprise’s account to the investee enterprise’s account or the equity transferor’s account without intermediary handling.
Non-Cash Payments	For non-cash forms like in-kind or negotiable securities, the asset ownership must be transferred directly from the profit-distributing enterprise to the investee enterprise or the equity transferor without intermediary handling.

Understanding and complying with China’s withholding tax regulations is crucial for non-resident enterprises to avoid penalties and optimise their tax liabilities.

At Woodburn, we specialise in providing comprehensive tax advisory services to help businesses navigate the complexities of China’s tax system. Our experts can assist with compliance, optimise your tax strategies, and ensure you take full advantage of applicable tax treaties and deferral options. Contact us today to learn how we can help your business manage withholding tax effectively.

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