Double Taxation Treaties with China
Chinese double taxation policy is extensive and has become more robust in recent years. Relief from double taxation can be covered through China’s extensive network of double taxation treaties or through unilateral relief policy. The provisions of these double-taxation treaties are especially useful, not only for multinational corporations and Chinese tax residents, but also for foreign companies that charge services to a China-based entity (that would be subject to a withholding tax). The bulk of China’s double taxation treaties was written and signed in the past several years and, as such, cover IT, Internet, and communications related issues.
Double Taxation Agreements
China has extensively signed double taxation agreements, with the aim to promote economic integration and signal ongoing friendliness to foreign investment. Each taxation treaty specifies whether the right to taxation is with the country of source or the country of residence.
Main Features of China’s Double Taxation Treaties
- Relief from double taxation on all types of income including corporate income tax, individual income tax, withholding taxes and dividend taxes
- Protection for companies in one jurisdiction from being subjected to discriminatory taxation in another
- Compliant with the OECD’s Exchange of Information Provisions
When a non-Chinese entity bills a Chinese one for services provided, the non-Chinese entity is subject to a withholding tax. As a non-resident enterprise, the withholding tax exists in place of another form of taxation (that is, the taxation that a tax resident enterprise would be subject to). Withholding tax is typically 10-20% of the invoiced amount. Double taxation treaties often reduce this amount by nearly 50%. This treatment of withholding tax is useful for multinational companies with an affiliates incorporated in China. For example, when a Chinese affiliates pays a licensing fee to a foreign affiliate for use of the MNC’s intellectual property, the withholding tax in the presence of a double-taxation treaty will often be reduced to around 10% when they might otherwise be closer to 20%.
China levies a 10% tax on profit repatriation. Many double taxation agreements reduce the dividends tax by 50%.
Double-Taxation Agreements by Region
Asia & Oceania
Australia, Azerbaijan, Bahrain, Bangladesh, Brunei, Cambodia (signed but not yet effective), Georgia, India, Indonesia, Iran, Israel, Japan, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Laos, Malaysia, Mongolia, Nepal, New Zealand, Oman, Pakistan, Papua New Guinea, the Philippines, Qatar, Saudi Arabia, Singapore, Sri Lanka, Syria, Tajikistan, Thailand, Tunisia, Turkmenistan, Turkey, United Arab Emirates, and Vietnam.
Albania, Armenia, Austria, Belarus, Bulgaria, Belgium, Croatia, Cyprus, Czech, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Latvia, Lithuania, Luxembourg, Macedonia, Malta (signed but not yet effective) Moldova, Norway, Sweden, Iceland, Ireland, Italy, the Netherlands, Poland, Portugal, Romania, Russia, Serbia and Montenegro, Slovakia, Slovenia, Spain, Switzerland, United Kingdom (the U.K.), Ukraine, Uzbekistan, and Bosnia and Herzegovina.
Algeria, Botswana (signed but not yet effective), Egypt, Ethiopia, Morocco, Mauritius, Nigeria, Seychelles, South Africa, Sudan, Uganda(signed but not yet effective), Zambia and Zimbabwe.
Barbados, Brazil, Canada, Chile, Cuba, Ecuador, Jamaica, Mexico, Trinidad and Tobago, Venezuela, and the US.
China also has double taxation agreements with Hong Kong, Macau, and Taiwan. The Hong Kong agreement covers China’s individual income tax, foreign enterprise income taxes and Hong Kong’s profit, salaries, and property taxes.
How to Claim Double-Taxation Relief from a Double-Taxation Agreement
To take advantage of an applicable double taxation treaty, a company must be enacted to it. These are recommended steps to follow:
- Review the relevant double taxation treaty to determine the provisions of the treaty applicable to your business.
- Write the treaty benefits into your business plan.
- Obtain a tax residence certificate issued by the taxation administration of the country of tax residence.
- Speak with local tax authorities your decision to seek treaty status and complete the registration procedures.
China’s tax authorities carefully review business and transnational arrangements among foreign affiliates, addressing the tendency of MNCs to use related party transactions to reduce taxable income. It is recommended that the Chinese entity show explicit intent to take advantage of the provisions of double-taxation treaties. This may help to reduce tax authorities’ concerns that the company wishes to use related-party arrangements to reduce taxable income.
OECD Multilateral Instrument
In 2017, China signed the OECD Multilateral Instrument, which will significantly update almost half of China’s double taxation treaties. One of the updates will be the introduction of the anti-abuse principle purpose test. Overall, as the signing of this agreement introduces many minor changes, it important for businesses that have already been taking advantages of any of China’s double taxation treaties to revisit them and check if the myriad of minor changes will have an impact on their current arrangements.
Unilateral double taxation relief (non-tax treaty)
If a tax resident earns income from a country that has not signed a double-taxation agreement with China, the tax payer is entitled to a tax credit for the tax paid overseas on that income. The tax credit cannot exceed the amount otherwise payable. In the event that the tax credit exceeds limit, it may be carried forward for five years. An indirect tax credit is also permitted.