China’s double taxation relief for resident taxpayers
To forge its strategy of “going global”, China has signed multilateral tax treaties with several countries. The first tax treaty ever signed was in 1983 between China and Japan. As of May 2019, China has entered tax treaties or arrangements with 110 countries as shown in the table below.
*The tax treaties in these countries are not yet effective as of May 2019.
China’s double taxation agreements (DTAs) with other countries cover the payment of taxes for the different types of taxes.
- Individual income tax (IIT)
- Corporate income tax (CIT)
- Withholding tax (WHT)
- Dividend tax
Furthermore, the aspects of the tax treaties depend on every country’s agreement with China. Nevertheless, the double taxation relief entails that taxes can be reduced by 50 percent. For instance, a foreign company is subject to withholding taxes for the paid services provided by a China-based entity. By invoking a double taxation agreement, a 20 percent WHT can be halved by 10 percent. Thus, the use of DTA reduces a non-resident entity’s tax burden at large.
Meanwhile, a foreign individual can claim foreign tax credits for his or her payable income taxes under the said treaty.
How to claim tax benefits under the DTA?
To take advantage of the double taxation relief, one must make an effort to fully examine and understand applicable provisions. Only then can an individual or a business can be entitled to tax treaty benefits. According to the implementing rules and regulations, a non-resident taxpayer who makes self-declaration of income taxes must submit an “Information Report on Non-resident Taxpayers Claiming Treaty Benefits“.
Furthermore, the following materials must be made available for the future evaluation process.
- A certificate or proof of identity from the country of jurisdiction proving the tax residency status (with Chinese translation);
- Related documents such as contract, agreement, board resolution or shareholders’ meeting resolution and proof of payment of income taxes;
- “Beneficiary owner” proof of identity for tax claims on dividends, interest or royalties under the tax treaty;
- Other materials deemed satisfactory to prove qualification under the DTA.
A foreign individual eligible under the tax treaty and has overpaid taxes can get a refund through self-application or a withholding agent. Local tax authorities will review the refund application within 30 days and then release the overpaid tax amount.
You may refer to the English translation of the State Taxation Administration’s Announcement 35  for more details.
Advantage of DTA on foreign enterprises
Among those who can benefit a lot from tax arrangements include trading enterprises due to their association with a permanent establishment. Cross-border taxation on profits gained by trading enterprises with no PE is not applicable. Therefore, they are exempt from paying taxes for their business income. A PE refers to the actual business presence of a foreign company in China. Moreover, it can also refer to dispatched employees or personnel to China, independent agents, or construction or building sites.
Foreign-invested enterprises can remit their dividends (profits) with huge cuts on withholding taxes. As mentioned earlier, withholding taxes on dividends can reduce by half following a tax treaty application. Thus, shareholders of multi-national companies can save a significant amount of their profits supposedly accounted for payable taxes.
The implications of a double taxation treaty may vary for different business structures or dealings and many companies may be unaware of its benefits. On the other hand, local tax authorities in China may be unfamiliar with the full extent of the DTA applicability or its processes. Hence, it is best to seek professional advice or assistance before going through self-application procedures.
If you need help with further understanding tax treaty applications on your personal income tax or business, do not hesitate to contact our team of local and foreign experts who can assist you regarding this matter.