Non-trade outbound remittance can be one of the biggest challenges for foreign companies and non-resident companies operating in mainland China. This article provides an overview of how foreign-invested enterprises should process taxes related to non-trade outbound remittance.
Non-trade outbound remittance
Non-trade outbound remittance refers to foreign exchange payment to foreign enterprises or institutions for their service provision or other income sourced from China, such as profits, interest payments, rental fees, royalty fees, and other income related to the transfer of capital and properties.
As one of the major tax challenges for foreign enterprises and non-resident companies (NRCs) in business transactions with Chinese companies, it is important to set the record straight on the fiscal treatment of related flows in order to avoid issues and a lack of documents or proof required by the local financial authorities.
Tax implications of non-trade outbound remittance
Withholding
Withholding refers to the way in which organisations and individuals with tax withholding obligations for the taxpayer act in accordance with China's fiscal policies. The resident taxpayer directly deducts the corresponding fiscal impact from the remittance on behalf of the payee before a transaction is processed at the bank. The purpose of this procedure is to manage and control the local source of income and mitigate tax avoidance practices.
Withholding agent
A withholding agent refers to resident companies obliged to proceed with declarations on behalf of their overseas providers who obtain income from China without establishing an office or entity in the region. The aforementioned income is subject to enterprise income tax and VAT according to local tax regulations.
Withholding tax
Withholding tax refers to income tax withheld in advance of payment. Withholding tax is not a type of tax, but the global customary name for income tax withheld at source. As prescribed in Chinese tax law and implementation regulations, foreign enterprises that obtain profits (dividends and bonuses), interest, rents, royalties and other income from China are subject to 10% income tax.
Domestic tax regulations in relation to non-trade outbound remittance
- Interim Measures for the Administration of Taxation on Non-Residents for Contracting Engineering Projects and Providing Services (Order No.19 of the State Administration of Taxation)
- Announcement on Issues Concerning Taxation Recordation for Foreign Payments Under Trade in Services and Other Items (Announcement No. 40 [2013] of the State Administration of Taxation and the State Administration of Foreign Exchange)
- Notice of the State Administration of Foreign Exchange on Issuing Service Trading Foreign Exchange Administration Rules (No.30 [2013] of State Administration of Foreign Exchange)
- Measures for Non-Resident Taxpayers' Enjoyment of Treaty Benefits (Announcement No. 35 [2019] of the State Taxation Administration)
Outbound remittance process under current tax policies
Simplified process flow in practice
*requirements may vary subject to different regions and applicable tax authorities.
Common types of outbound remittance
1. Active income (Designated withholding)
- Operating profit/service income
2. Passive income (Withholding at source)
- Interest
- Royalties
- Dividends
- Property income
Tax calculation of non-trade outbound remittance
| Tax liability | Enterprise income tax | Value-added tax and surcharges |
| EIT, VAT and VAT surcharges are undertaken by the NRC |
Passive income: C/ (1+V)*10% (or T) Active income: C/ (1+V)*P*25% |
Passive income and active income: C/ (1+V)*V*(1+S) |
| EIT, VAT and VAT surcharges are undertaken by the Chinese company |
Passive income: C/ (1-10% (or T)-V*S) * 10% (or T) Active income: C/ (1-P*25%-V*S)*P*25% |
Passive income: C/ (1-10% (or T)-V*S) *V*(1+S) Active income: C/ (1-P*25%-V*S) *V*(1+S) |
|
The NRC undertakes EIT, while the Chinese company undertakes VAT and VAT surcharges |
Passive income: C/ (1-V*S) *10% (or T) Active income: C/ (1-V*S) *P*25% |
Passive income and active income: C/ (1-V*S) *V*(1+S) |
| The Chinese company undertakes EIT, while NRC undertakes VAT and VAT surcharges |
Passive income: C/ (1+V-10% (or T) ) *10% (or T) Active income: C/ (1+V-P*25%) *P*25% |
Passive income: C/ (1+V-10% (or T) ) * V* (1+S) Active income: C/ (1+V-P*25%) *V*(1+S) |
The following letters represent the computational factors involved:
- Contract amount: C
- Value-added tax rate: V
- Preferential tax rate under double tax treaties: T
- Deemed profit rate: P
- VAT surcharges tax rate: S
‘Preferential tax rates’, under double tax treaties as mentioned in the above table, reflect the favourable tax rates that enterprises may be entitled to enjoy. So, what are double tax treaties? Under which circumstances can enterprises enjoy preferential tax rates?
Introduction and application of double tax treaties
What is a double tax treaty?
Double tax treaties are also called ‘tax pacts’. They refer to written agreements signed by sovereign states to deal with mutual tax distribution relations.
How do double tax treaties avoid double taxation?
Double tax treaties limit the right to tax in accordance with domestic tax laws by lowering the tax rate or raising the tax threshold in the country of origin, and providing tax credits for foreign taxable income in the resident country, thus avoiding double taxation by both parties.
Common applications of double tax treaties
- Service permanent establishments
- Investment income (dividends and bonuses)
- Interest
- Royalties
- Income from property transfers
- Income from international carriages
- Personal services (employment income)
Maximising the legitimate tax benefits under the current tax regime
Under the premise of following the general policies of the State Administration of Taxation, local tax authorities in China have a certain level of autonomy in the collection and administration of tax treatments, which may result in regional differences in tax practices.
Preferential tax rates that taxpayers can enjoy according to relevant tax policy do not apply automatically. While non-resident taxpayers have the right and obligation to apply for tax preferences and to submit the relevant documents as required by the relevant tax authorities, in practice, many non-resident taxpayers lack knowledge of their application rights or do not have a local representative in China to assist them in this regard.
From the Chinese service recipients’ perspective, they often have no interest or intention in helping their service providers in this process, leading to unnecessary taxes being paid or not being able to enjoy the tax incentives for which they are eligible.
Non-resident taxpayers should actively seek assistance from Chinese tax professionals when dealing with outbound remittance issues, with the goal of maximising the legitimate tax benefits under tax policies.
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