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China Withholding Tax Overview

Updated:2018-7-4 17:02:02    Source:www.tannet-group.comViews:59

The withholding tax is an income tax to be paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income due to the recipient. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require withholding tax on payments of interest or dividends.

In China, withholding tax (WHT) is levied on the income of foreign enterprises that do not have a physical establishment in China but provide services to China-based businesses. Any China-derived income arising from such a transaction between an overseas entity and a Chinese business is withheld by the China-based client, deducted from the gross income amount, and taxed by the Chinese tax authorities.

Therefore, it is the responsibility of the China-based client to ensure the transfer of tax onto the tax bureau. If they fail to do so, or do not pass on the correct or relevant amount from an invoice, the local tax bureau will take up repayment with the China-based client, and not the overseas entity.

Withholding Tax Policies in China
China’s withholding tax policies have tightened and changed. For non-tax resident enterprises, with or without a physical presence in China, as well as those with income not effectively connected with a physical presence, their China-sourced income is subject to CIT. This includes income deriving from:

Sales of goods;
Provision of services;
Transfer of property;
Dividends and profit distribution;
Equity investments;
Interest;
Rent;
Royalties; and
Donations.

In December 2017, China's Ministry of Finance (MOF), the State Administration of Taxation (SAT), and the National Development and Reform Commission and Ministry of Commerce (MOFCOM) jointly introduced Cai Shui [2017] No.88, which is relevant for multinational corporations (MNCs) operating in the country. China's new withholding tax deferral scheme (Cai Shui [2017] No. 88) provides tax breaks for foreign companies if they directly reinvest the dividends into industries promoted by the Chinese government.

Withholding Tax Payable
Corporate income tax payable will be withheld at the source, with the payer acting as the withholding agent, who will withhold tax from the amount of each payment when it is due. Therefore, the withholding obligation arises when income is either remitted or when the payer accrues the amount as a cost or expense. Correct calculation of tax liability is as follows:

Withholding tax payable = Taxable income×Tax rate

For dividends, interest, rental, and royalty income, the taxable amount is the gross amount remitted before deduction of any taxes, including business tax. If the withholding tax and business tax is borne by the payer, the amount of income should be added up to produce the taxable income.

For dividends paid overseas, no business tax is levied. For income from the transfer of property, the taxable income amount is the balance of the total income amount minus the net value of the property. For other income, the taxable income amount can be calculated according to the formulae of the preceding two items.

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