China Tax Administration Guide (2) – Scope of Tax Paying Obligations
2.1 Enterprises with foreign investment which establish their head office in China shall pay Income Tax on the income derived from sources inside and outside China. Foreign enterprises shall pay Income Tax on income derived from sources within China.
(GUO WU YUAN LING 1991.6.30)
2.2 ‘Head office’ in Article 3 of the Tax Law refers to the central organization of an enterprise with foreign investment which is organized in China as an enterprise legal person according to the laws of China, and which is responsible for the administration, operation and control of that enterprise.
(GUO WU YUAN LING 1991.6.30)
2.3 ‘Income derived from sources inside China’ in Article 3 of the Tax Law refers to:
A. Income from production and business operations of enterprises with foreign investment and by foreign enterprises which have established organizations or sites in China, as well as profits (dividends), interest, rental income, royalties and other income arising within or outside China which is actually connected with the organizations or sites established in China by that enterprise.
B. The following income received by foreign enterprises in China who do not have established organizations or sites:
a. interest (dividends) income received by enterprises from within the borders of China;
b. interest derived within China such as on deposits or loans, interest on bonds, interest on other provisional payments and deferred payments;
c. the rental income derived from property leased to lessees within the borders of China;
d. royalties such as those received from the provision of patents, technical know-how, trademarks and copyright for use in China;
e. income received from the transfer of property within the borders of China such as, houses, buildings and their attached facilities, land use rights, etc.;
f. other income received from within the borders of China on which tax is levied according to the determination of the Ministry of Finance.
(GUO WU YUAN LING 1991.6.30)
2.4 The matter of levying tax where a foreign business authorizes a domestic company or enterprise to sell its products as agent or on commission, or sells spare parts as agent
A. If, according to the agency agreement or contract signed with the foreign enterprise, a domestic company or enterprise has set up a particular business operation for a foreign enterprise whose total business or most of whose business is to sell the products of the foreign enterprise on a commission basis or is responsible for maintenance and repair of the engineering goods it sells for the foreign enterprise as well as for selling the relevant parts and components, Industrial and Commercial Consolidated Tax and Enterprise Income Tax for retail sales shall be levied according to the provisions of the Tax Law, on the business income and operating profit achieved by the foreign enterprise. For the commission and service charge obtained by the domestic enterprise, tax shall be paid according to the relevant tax laws and regulations applying to domestic enterprises.
B. On condition that a domestic company or enterprise sells products, components and parts on a commission basis at the price set by a foreign enterprise upon entrustment by that foreign enterprise, or the price is set by both sides on negotiation and the sales revenue is allocated in the proportions decided on negotiation, and there is no establishment for business operation set up particularly for the foreign enterprise, the domestic company or enterprise shall pay tax on its business income (including the income from the sales revenue allocated, commissions and service charges) according to the tax laws and regulations applying to China¡¦s domestic enterprises; in addition, the foreign enterprise shall pay Industrial and Commercial Consolidated Tax for the sales revenue collected from retail sales, while it shall not pay Enterprise Income Tax.
C. Accounts shall be settled between a domestic company or enterprise and a foreign enterprise which entrusted it, at FOB prices or CIF prices for the goods sold on a commission basis and goods on consignment; the sales price shall be decided by the domestic company or enterprise who shall get the income from the difference between the sales price and import price, and the goods shall be regarded as goods imported for sale by the local company or enterprise. The foreign enterprise shall not pay Industrial and Commercial Consolidated Tax or Enterprise Income Tax for retail sales on the income obtained.
D. A local enterprise shall pay tax according to the relevant tax laws and regulations and a foreign enterprise might be permitted not to pay Industrial and Commercial Consolidated Tax or Enterprise Income Tax for the retail sale of chemical products, instruments and meters to be used specifically for Chinese or foreign oceangoing freighters sold by the local enterprise, on a commission basis, for the foreign enterprise which entrusted it, whether the price is decided by the foreign enterprise or by both sides through negotiation, since the goods are supplied to Chinese or foreign oceangoing freighters directly from bonded warehouses.
(CAI SHUI WAI ZI 1983.10.6)
2.5 On condition that a foreign enterprise, entrusted by a domestic enterprise, designs a construction or an engineering project, that all the work regarding the design plan, calculation and mapping, etc., is carried out outside China, (except for the work e.g., field survey, information and data collection, conducted by personnel sent from the foreign enterprise before the start of the design), and that the blueprints are provided to the enterprise in China upon the completion of the design, then a lenient policy may be adopted for the foreign enterprise in this case, who shall, provisionally, not pay tax on the income from the design work.
(CAI SHUI WAI ZI 1986.7.15)
2.6 On condition that a foreign enterprise, entrusted by or cooperating with or integrated with an enterprise in China, designs a construction or an engineering project and all the work or part of the work regarding design plan, calculation and mapping is carried out outside China, and that upon completion of the design, personnel from the foreign enterprise are sent to China to explain the blueprints and to conduct supervision and management as well as provide technological support in the construction of the designed project in addition to the work carried out by the personnel sent from the foreign enterprise regarding field survey, information and data collection before the start of the design; since all the above facts imply that the foreign enterprise actually has already set up establishments or sites in China to conduct their business operations, the foreign enterprise shall pay Industrial and Commercial Consolidated Tax and Enterprise Income Tax as a profit-earning enterprise, according to the tax laws, on the remaining income obtained by deduction of payments collected by the foreign enterprise for the part of the design work carried out outside China, from the total income for the design. However, the foreign enterprise shall pay tax for all its income if the fee for the design work carried out outside China is not clearly written in the entrustment design contract or the foreign enterprise fails to present a cooperative (or joint ) design contract, or accurate documents to accurately separate the design work carried out outside China from that done inside China.
(CAI SHUI WAI ZI 1986.7.15)
2.7 Before tax payments, the foreign enterprise shall complete tax returns according to law, which shall be checked and approved by the tax authorities if the foreign enterprise shall pay Industrial and Commercial Consolidated Tax or Enterprise Income Tax according to Article 2 of this notice on the business income from the design work for construction projects or engineering projects carried out by entrustment of a domestic enterprise or by cooperation ( or integration ) with a local enterprise. The foreign enterprise shall pay tax on taxable income calculated according to the profit margin appraised and decided on the basis of Article 24 of the “Detailed Rules and Regulations for the Implementation of Income Tax Law on Foreign Enterprises” after checking and approval by the local tax authorities, if the foreign enterprise cannot present accurate vouchers on costs and expenses, making it impossible to calculate the taxable income correctly. To facilitate calculations, provisionally, the taxable income shall be defined as 15% of the total income from the design work.
(CAI SHUI WAI ZI 1986.7.15)
2.8 The fee income from design work collected by a foreign enterprise from the transfer of know-how is a part of the contract fee in a technology trade contract; it is different from the income from usual design work, and is a fee for the transfer of the right to use technology and shall be listed in fees for know-how, and thereby levied tax.
(CAI SHUI WAI ZI 1986.7.15)
2.9 Tax payment by a foreign company, enterprise or other economic organization on the income from supplying management services in China The income collected for management services provided to an enterprise by a foreign company, enterprise or other economic organization shall be regarded as income collected by a foreign enterprise who has an establishment or a place supplying labor services in China, and based on the above statement, the foreign enterprise shall pay Industrial and Commercial Consolidated Tax and foreign Enterprise Income Tax on such income.
The taxpayer shall pay Enterprise Income Tax according to an appraised profit margin if he fails to present accurate vouchers for costs and expenses, account books, other vouchers, etc. The profit margin shall be decided by the tax authorities of the local province, autonomous region or municipality between 20% and 40% according to the profit margin in the same industry at the place where the management service is carried out, and the decided profit margin shall be reported to the State Administration of Taxation or the Ministry of Finance to be put on record.
(CAI SHUI WAI ZI ［033］ 1987.2.22)
2.10 If, during the reorganization of a company group for reasonable operation, foreign enterprises transfer their stock ownership of enterprises within China (or enterprises with foreign investment transfer their stock ownership of enterprises either within or outside China) to an associated company which is directly or indirectly owned or to a company whose stock is 100% owned by the enterprise transferring the stock, (including where the stock ownership is transferred to Chinese investment companies with the relationship above), such transfer may be carried out at the cost of the stock ownership, therefore Enterprise Income Tax shall not be levied since there are no gains or losses derived from such transfer.
(GUO SHUI HAN ［207］ 1997.4.17)
2.11 The definition of the resident representative office of a foreign enterprise
‘The resident representative office of a foreign enterprise’ refers to the one established in China by a foreign enterprise or other foreign economic organization who has registered at the Industrial and Commercial Administration after approval by the relevant ministry, committee or bureau of State Council, according to the Interim Regulations made by State Council regarding the administration of the resident representative offices of foreign enterprises.
The Interim Regulations also apply to the resident representative office established by an enterprise of overseas Chinese, or an enterprise or other economic organization in Hong Kong or Macao.
The agent services mentioned in ‘a resident representative office conducts agent services outside China, entrusted by an enterprise in China’ in Article 1 of the Interim Regulations refers only to selling goods on a commission basis outside China by the resident representative office of a foreign enterprise, entrusted by an enterprise in China.
(CAI SHUI ZI 1985.5.13)
2.12 The definition of ‘the head office’ to which ‘the resident representative office of a foreign enterprise’ belongs
‘The head office’ to which ‘the resident representative office of a foreign enterprise’ belongs refers to the foreign company, enterprise or other economic organization who has established and is responsible for the resident representative office. Usually the head office and the resident representative office belong to the same economic accounting unit.
(CAI SHUI WAI ZI ［197］ 1985.9.25)
2.13 The resident representative office shall not pay Industrial and Commercial Consolidated Tax or Enterprise Income Tax if it has not obtained income from business operations and services carried out for the head office such as market survey, commercial data collection, business liaison, consultation, service, etc..
(CAI SHUI ZI ［110］ 1985.5.15)