The State Administration of Taxation announced new requirements relating to the withholding of corporate income taxes at source for non-resident enterprises by promulgating the Announcement on Issues Concerning the Withholding of Corporate Income Taxes at Source for Non-Resident Enterprises (hereinafter, the “Announcement”) on October 17, 2017. The Announcement, which came into effect on December 1, 2017, pertains primarily to provisions on the scope of application, determination of equity transfer income, conversion between RMB and foreign currencies, the determination of the withholding date, and the withholding jurisdiction. Details are specifically highlighted below:
1.Application scope of the Announcement
Under Article 1 of the Announcement, the Announcement only covers matters relating to the withholding of corporate income taxes at source for non-resident enterprises as found in Articles 37, 39 and 40 of the Enterprise Income Tax Law; it does not apply to matters relating to the enforcement of Article 38 of the Enterprise Income Tax Law. The withholding of income generated by non-resident enterprises from their engineering operations and services in China is not governed by the Announcement.
2.Determination of equity transfer income
Under Article 3 of the Announcement, equity transfer income refers to the balance of equity transfer income after the net equity value is deducted. Equity transfer revenue refers to the consideration received by the equity transferor as a result of the equity transfer, which includes monetary and non-monetary revenues. Net equity value refers to the actual capital contribution cost paid at the time of equity investment by the transferor of the equity, or the actual cost paid to the original transferor for the transfer of the equity when the equity is purchased. Due to the appreciation or depreciation of the equity during the holding period, the article also provides that the net equity value may be adjusted if the profit or loss can be determined. In addition, this article also indicates that when calculating an equity transfer income, an enterprise shall not deduct undistributed earnings of an invested enterprise, such as the potential amount to be received by the shareholder pursuant to the equity held For the transfer of equity which has been invested or purchased multiple times, the corresponding cost of the transferred equity shall be determined by calculating the total cost associated with such equity based on the transfer percentage.
3.Conversion between renminbi and foreign currencies
Under Article 4 of the Announcement, foreign exchange conversion of amounts paid or denominated in foreign currencies other than RMB that are paid or due and payable by a withholding agent shall be conducted per below in the following circumstances:
(1). A withholding agent withholding enterprise income tax shall convert the tax into RMB at the central parity exchange rate on the day the withholding obligation is incurred to assess the payable tax amount of a non-resident enterprise. The day the withholding obligation is incurred shall be the day when the relevant amounts are actually paid or become due and payable.
(2). For a non-resident enterprise which has generated income and has voluntarily filed and paid its tax withheld at source prior to the tax payment deadline imposed by a competent tax agency, the tax should be converted into RMB at the central parity exchange rate on the day prior to the day the tax pay-in warrant is prepared to assess the payable tax amount of the non-resident enterprise.
(3). A non-resident enterprise which has generated income and which is required by a competent tax agency to pay the tax withheld at source within a period shall convert the tax into RMB at the central parity exchange rate on the day prior to the day the competent tax agency issued its tax decision in order to assess the payable tax amount of the non-resident enterprise.
Meanwhile, Article 5 of the Announcement provides three scenarios for a property transfer revenue or net property value denominated by a currency other than RMB: tax withheld by a withholding agent, tax filed and paid by the taxpayer, and the competent tax agency imposing a deadline for tax payment. Under such scenarios, amounts not denominated in RMB shall be converted into RMB first pursuant to the Article 4 mentioned above before the payable tax amount for the revenue generated by a non-resident enterprise from property transfer is assessed. The denomination currency for net property value or property transfer revenue shall be determined by the denomination currency actually paid or received when the property is obtained or transferred. If the original denomination currency is no longer in circulation and a new currency used, the conversion rate in the market for the new and old currencies shall be used to convert the old currency into the new currency prior to assessment.
4.Determination of the withholding date
Pursuant to Article 7 of the Announcement, a withholding agent is required to file and pay the withheld tax to the local competent tax agency of the place where the withholding agent is located within seven days following the day the withholding obligation is incurred. To be specific, if an income is equity investment income, such as a dividend or bonus, the withholding obligation is incurred on the day the equity investment income is actually paid. If property transfer income is received in installments, the installments so collected may be treated as the cost of recovering past property investment, and the amount of tax to be withheld should be assessed after the cost is completely recovered.
With respect to the determination of the tax agency to which taxes are paid, Articles 10 and 16 of the Announcement provide that the local competent tax agency of the place where a withholding agent is located shall in principle be the competent tax agency for the income tax withheld by the withholding agent. However, if the same income generated by a non-resident enterprise involves multiple income sources and several competent tax agencies, one of the agencies may be chosen for tax filing and payment when a non-resident enterprise voluntarily files and pays a tax that was not withheld.
In addition, the tax agency responsible for different types of income shall be determined based on the following principles:
(1). In case of real estate transfer income, it shall be the national tax agency in the country where the real estate is located.
(2). In case of income from the transfer of an equity investment asset, it shall be the competent tax agency for the income taxes of the invested enterprise.
(3). In case of equity investment income such as dividends and bonuses, it shall be the competent tax agency for the income taxes of the enterprise distributing the income.
(4). In case of interest income, rental income or royalty income, it shall be the competent tax agency for the income tax of the organization or individual assuming or paying the income.
The Announcement addresses the lack of clarity in the provisions concerning the exchange rate for conversion between RMB and foreign currencies in the past, and it also cleans up issues with withholding dates and jurisdictions, provides more specific instructions concerning tax registration of enterprises, reduces the procedural burden on enterprises in the tax withholding process, while increasing the likelihood of enterprises to accurately assess its tax obligations. These are very favorable measures for both the state and enterprises.