The State Administration of Taxation has released the Announcement on Several Issues concerning the Administration of Income Taxes on Non-Resident Enterprises (the "Announcement"), which took effect on April 1, 2011. Some key provisions are summarized as below.
1. Income Due and Payable But Not yet Actually Paid
Where a domestic enterprise in China (the "Enterprise") enters into a contract with a non-resident enterprise concerning income such as interest, rent and royalties, but fails to make a relevant payment on the date specified in the contract, or make deferred payments through modifications thereto, the Enterprise shall withhold the enterprise income tax in compliance with the Enterprise Income Tax Law if it has included such payments in its current cost or expenditure and has made pre-tax deduction while filing its annual enterprise income tax return.
Where the Enterprise has included the aforementioned payments in corresponding asset prices or enterprise incorporation fees rather than the current costs or expenditures in one lump sum, amortized payments in costs or fees in equal installments after the assets are put into use or the Enterprise starts operation and made pre-tax deduction on a year basis the Enterprise shall also withhold enterprise income tax for the total amount of income while filing its annual income tax return in the year that relevant assets are recorded.
If the Enterprise made the aforementioned payments prior to the date agreed in the contract, it shall withhold enterprise income tax on the date of actual payment in compliance with the Enterprise Income Tax Law.
2. Guarantee Fees
A non-resident enterprise shall pay enterprise income tax at the tax rate for interest specified in the Enterprise Income Tax Law if it obtains guarantee fees or fees of the same nature paid or borne by domestic enterprises, institutions or individuals in China during economic activities such as borrowing money, buying and selling, goods transportation, processing, leasing and project contracting.
3. Income from Financial Leasing and Real Estate Leasing
Where a non-resident enterprise without any branch or establishment within the territory of China leases its equipment or articles to a domestic enterprise in China by way of financial leasing with the ownership of the equipment or articles transferred to the domestic enterprise after the expiration of the lease period (including the situation under which the equipment or articles are transferred after being appraised to the domestic enterprise), such rent collected by the non-resident enterprise (including the sum paid by the domestic enterprise after the expiration of the lease period) during the term specified by the contract shall be withheld by the domestic enterprise after deducting the price of the equipment or articles.
Where a non-resident enterprise without any branch or establishment within the territory of China leases its real property, such as houses or buildings located in China, the total amount of rent on such houses or buildings shall be withheld by the domestic tenants when they pay rent or when the rent becomes due and payable.
Where a non-resident enterprise dispatches employees or entrust other domestic units or individuals to conduct daily management of the aforesaid real property within the territory of China, such non-resident enterprises shall be deemed to have a branch or establishment within the territory of China, and it shall, within the time limit specified by the Enterprise Income Tax Law, file an enterprise income tax return.
4. Income from Equity Investment
Equity investment income, such as dividends and bonuses received by a non-resident enterprise, shall be withheld by domestic enterprises on the date when the payment decision is made. If the actual payment is effected prior to the profit distribution decision, enterprise income tax shall be withheld on the date of actual payment.
5. Income from Equity Transfers
According to the Circular of the State Administration of Taxation on Strengthening the Administration of Enterprise Income Tax on Income from Equity Transfer by Non-Resident Enterprises (the "Circular"), a nonresident enterprise shall confirm income to be realized upon execution of contract and completion of equity transfer procedures, if it directly transfers shares of a domestic enterprise via installments.
If a foreign investor simultaneously transfers the equity shares of more than two (inclusive) domestic enterprises located in different provinces (municipalities), it may elect to complete submissions to the competent taxation authority with jurisdiction on one of the above domestic enterprises. The elected taxation authority will then discuss with the non-elected taxation authority with jurisdiction to determine the tax obligation, and report to the State Administration of Taxation. Once the tax obligation is determined, the foreign investor shall pay taxes respectively to each competent taxation authority at the place where every relevant domestic enterprises is located.
- Announcement on Several Issues concerning the Administration of Income Taxes on Non-Resident Enterprises
- Issuing Authority: the State Administration of Taxation
- Date of Issuance: March 28, 2011 / Effective Date: April 1, 2011