Under article 10 of Circular Caishui [2009] No. 125,2 the following simplified calculation method for tax credits on offshore income may be applied:

  1. Where an enterprise obtains overseas operating profits and dividend income that meet the indirect credit conditions of offshore taxes and, even with proof from the overseas tax authorities of the country (or region) where the income is earned that the tax was paid, it is difficult, for objective reasons, to truly and accurately verify the overseas taxes that should have been paid and have actually been paid. If the tax burden in the country (or region) where the income is earned is lower than the Chinese standard EIT rate (i.e., 25%) by more than 50%, 12.5% of the overseas taxable income can be claimed as the foreign tax credit limit. If the overseas tax paid does not exceed the limit, the proved tax payment is allowed to be credited in full; however, if the overseas tax paid exceeds the limit, the exceeding portion cannot be credited.
  2. Where an enterprise obtains overseas operating profits and dividend income that meet the indirect credit conditions of offshore taxes, if the statutory tax rate and effective tax rate directly paid and indirectly borne in the country (or region) where the income is earned is considerably higher than China’s, 3 the foreign tax credit limit will be calculated based on the overseas taxable income according to Circular 125 and on China’s EIT rate. The resulting limit will determine the deductible amount of foreign tax payment.

Following cancellation of several examination and approval procedures, SAT’s Announcement [2015] No. 70 was recently released to specify that taxpayers may apply the above simplified tax method by filing the relevant documents during the annual EIT filing period with the in-charge tax authorities. The tax authorities’ prior approval is no longer required.

Date of issue: October 10, 2015. Effective date: October 10, 2015.