Highlight: to introduce you the regulations concerning the withholding tax in China, including the scope and the calculation base of the tax.

Recently a reader consult our website for the relevant legal problems regarding the withholding tax in China. The withholding tax is a usually encountered question in foreign exchange payment for those foreign companies having cooperation with Chinese enterprises in intellectual property right. Ms. Chen Danhong, the attorney of our website replied the question as follows:

I. The subject of the withholding tax 

The subject of the withholding tax includes the taxpayer and the withholding agent. And the taxpayer shall refer to the foreign enterprises collecting the payment of incomes in China, and the withholding agent refers to the domestic enterprises or individuals remitting to the foreign enterprises. If there is a contract between the taxpayer and withholding agent, the Record-Filing Form for the Registration of Contract on Withholding of Enterprise Income Tax, the copy of the contract and its Chinese version, and other relevant materials shall be sent to the China tax authority within 30 days after the signing of the contract.

II. The scope and calculation of the withholding tax

According to China taxation laws and regulations, the withholding tax shall be calculated based on the total amount of the incomes from the dividends, bonuses and other equity investment proceeds, interests, rentals and royalties, and the balance of the total amount of incomes of the assignment of property less the net value of the property, moreover the taxes and expenses not mentioned above shall not be deducted. However, the interest coming from the loan to the Chinese government by foreign authority, the preferential loans to the Chinese government by the international financial organization or resident enterprises and other incomes approved by the State Council could be exempted from the enterprise income tax.

Usually, the payment of the incomes obtained in China paid to foreign companies or individuals shall be cleared in foreign currency other than RMB, therefore, the withholding agent shall convert the tax to be withheld into RMB based on the RMB middle swap rate released on the withholding day when making a declaration of withholding enterprise income tax.

The calculation formula for withholding amount of payable enterprise income tax is: Amount of payable enterprise income tax to be withheld = Amount of taxable incomes ×Actual collection rate

The withholding agent shall be taxed at the reduced rate of 10% in accordance with the relevant Chinese taxation laws and regulations, unless there is a lower rate specified in a treaty signed by and between China and another country.

III. The Operation of Tax-including

The tax-including means the taxpayer and withholding agent agreeing upon the actual amount of incomes the taxpayer ultimately obtains rather than the payable enterprise income tax for the taxpayer, that actually transfers the withholding tax to the withholding agent.

Regarding to the tax-including of the withholding tax, the Article 10 of the Interim Measures for the Administration of Remittance of Income Tax for Non-Resident Enterprise Withheld at Source clearly provides that with regard to any payable taxes that the withholding agent is obliged to undertake as agreed in the contract, the incomes excluding tax gained by the taxpayer shall be converted into incomes including tax. The amount of taxes to be collected shall be calculated based on the said incomes including tax. Therefore, the tax-including of withholding tax is legitimate, while the incomes excluding tax gained by the taxpayer shall be converted into incomes including tax when calculating the tax amount payable.

IV. Foreign Exchanges Payment 

It is not necessary for the domestic enterprises and individuals to open a new bank account under the current items when remitting foreign exchange to other countries, and the remittance could be made with their original bank account after purchasing the foreign exchange. But the bank will require the remittance party submit various materials and deduct the withholding tax according to the relevant regulations released by the State Administrative of Foreign Exchange.

For example, when to remit foreign enterprises the profits, dividends and bonuses, it is required to submit the written application, the Foreign Exchange Registration Certificate for the Foreign Invested Enterprises, the Board Director’s Profit Distribution Resolution, the Annual Audit Report of Dividends and Bonuses, the Taxation Certificate, the Business License and other materials required.

For the foreign exchange payment involving the payment of the license fee (excluding assignment) of the patent, trademark and copyright, it is required for the remittance party to submit the written application, contracts or agreements, invoice or payment notice, the certificate issued by the Chinese competent authority in charge of patent, trademark, copyright and assignment of technology or the license agreement sealed for record by the aforesaid competent authority, the taxation certificate of the withheld withholding tax.

Author: Ms. Chen Danhong
Paralegal of DeBund Law Offices
Co-author: Mr. You Yunting
Founder & Editor-in-Chief of Bridge IP Law Commentary
Partner & Attorney-at-law of Shanghai DeBund Law Offices
Email: Bridge@chinaiplawyer.com, Tel: 8621-5213-4900,
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