By Teresa Zhang
China Administration of Taxation recently promulgated a Circular (Guoshuifa 2009 No 3) (“hereinafter referred to as “The Circular”) to strengthen the control of Non-TRE Income Tax Resourcing Deduction. The below mentioned enterprises shall be regarded as Chinese Tax Resident Enterprise (TRE):
a. An enterprise which is established and registered in China, or
b. An enterprise which has in actual fact a management institution in China.
Correspondingly, Article 2 of the Circular indicates that so called Non-TRE which shall be set up in accordance with the law of the foreign country (region) whose actual administration institution is outside China; could have incomes originating from China without setting up institutions or establishments in China or they have already set up institutions or establishments in China but the income is not effectively connected with the institutions or establishments that were set up in China.
If a non-tax resident enterprise (“Non-TRE”) derives passive income, interest, dividend, rental, royalties and capital gains, etcetera from China, the payer of the income in China, a so-called Withholding Agent, is obligated to withhold and settle the withholding income tax (“WHT”), if any, on the passive income to the Chinese tax authorities at the time when the payment of the passive income is made or due.
Aforementioned income shall be divided into two categories. The first category is service income, since there is some specialty while determining tax liability considering the limit in respect of the length of time by the contact, shall be regarded as one category; besides, the income listed above shall fall into the second category of income. The tax treatment against these two categories of incomes is different. For service income, the tax bureau will ratify relevant margin align with the industry to which the service belong. For the second category of income, the taxation rate is normally ten percent.
The Circular sets out the detailed requirements for the Withholding Agents in relation to the WHT withholding obligations. It is generally considered that Circular 3 provides more strict collection measures than previous regulations. It will have significant impact on both non-TRE taxpayers and the Chinese Withholding Agents.
Teresa Zhang, Horwath Capital China