Tax treatment for cross-border payments
Cross-border payments to entities outside China may have CIT or VAT impact in terms of withholding taxes depending on some criteria. Moreover, some taxes may not be applicable under a tax treaty. Nevertheless, the tax treaties between China and other countries may also vary so different tax rates may apply. Meanwhile, individuals or organizations can apply the double taxation agreement of China with other countries when selling a company.
Read more: Tax Implications of Selling Your Company in China
The following are the tax treatments for the non-trading payments:
As for dividends, interest, and royalties, the CIT rate may reduce through a tax treaty application which varies according to country jurisdiction. Moreover, a non-tax resident individual or company should meet the conditions of a “beneficiary” owner in order to take full advantage of the tax treaty preferential rates. Foreign individuals who receive dividends from WFOE or JV may be tax-exempt depending on a case to cases basis. To note, domiciled individuals are normally taxed at a flat rate of 20 percent.
Service fees category
Service fees rendered outside China are not taxable with CIT, however, authorities will require certain documentation proving that the service is fully rendered outside China. Otherwise, services rendered fully or partially inside China will be taxable based on deemed profit rate ranging from 15 percent to 50 percent depending on the nature of the service as follows:
- For those engaged in contracted project operations, design, and consulting services, the profit rate is 15%-30%;
- For those engaged in management services, the profit rate is 30%-50%;
- The profit rate shall not be less than 15% for other labor services or business activities other than labor services
In terms of VAT, local tax rates may apply for withholding tax. For example, Shanghai charges 12 percent local taxes based on the VAT paid for service fees. Furthermore, VAT impact on services fees and royalties can be deductible by the withholders so long as they are general taxpayers (GTP) and the expense is within their normal operation scope.
Have a look at our recently published article on VAT payers: VAT Payers in China: Small vs. General Taxpayers
What are the conditions for the beneficiary owner?
The beneficiary owner is used as a condition for tax treaty application in China. It refers to the person who owns or controls the rights or property from which an income is derived. According to the interpretation of China’s State Taxation Administration Notice No. 9 on the issues related to “beneficiary owners” in tax treaties, there are five negative factors to consider in determining the beneficiary owner.
The applicant for the beneficiary owner should meet the following conditions to qualify:
- Under obligation, the applicant pays more than 50 percent of the income to residents of a third country (region) within 12 months of receiving the income;
- The applicant is not involved in any substantive business activities such as substantive manufacturing, distribution, and management activities;
- The applicant is exempt from tax on the relevant income or the tax on the income is not taxable in the country jurisdiction. If the income is taxable, the tax should have a very low charge rate;
- In terms of loan agreement where interest is paid, the creditor must have the loan or credit agreement with a third party containing the same principal amount, interest rate, and signing date;
- As per royalty payments (copyright, pattern, or technology licensing agreements), a relationship or agreement must exist between the non-resident and a third party relating to the transfer of ownership, right to use, etc.