Certain changes on China withholding tax obligations for non-residents
Passive incomes such as dividends, interests, royalties, capital gains derived from China by a non-Chinese tax resident enterprise (“NRE”) are generally subject to China enterprise income tax in the form of withholding tax. Effective from 1 December 2017, the following changes should be noted:
- The withholding obligation for a NRE deriving dividends from China arises on the date the payment is actually made, rather than on the date of the resolution to declare the dividends (or the date of the actual payment if it is paid before the resolution). This effectively results in a deferred timing of withholding obligation which not only helps reducing the withholding agent’s compliance burden, but also leaves sufficient time for taxpayers and withholding agents to prepare the necessary record-filing documentation to claim tax treaty benefit e.g. reduced withholding tax, where applicable.
- In cases where a NRE has derived income by installment sales of assets, its income arising will first be regarded as cost recovery, i.e. not taxable and the withholding tax on the capital gain will only arise upon full recovery of investment costs. In case the NRE has made multiple investments or acquisitions to one equity and the equity is to be transferred partially, the cost of the equity to be transferred should be recognized on a proportionate basis. Such change can bring about a deferral of tax if the investment is disposed of gradually over a period of time.
- Foreign currency income should be converted into RMB, and the timing of exchange rate conversion in the following three cases are clarified: a) Where the tax is withheld by withholding agent, the foreign currency amount shall be converted into RMB according to the exchange rate on the date the withholding obligation arises; b) where a NRE taxpayer self-reports and files a tax return, the foreign currency amount shall be converted into RMB according to the exchange rate on the day before the issuance of tax payment certificate; c) where the Chinese tax authority orders a NRE to pay tax, the foreign currency amount shall be converted into RMB according to the exchange rate on the day before the decision of setting the deadline for settling the tax payment is made.