China Tax Administration Guide (7) – Withholding Income Tax
7.1 Basic Regulations
7.1.1 Any foreign enterprise which has no establishment or site in China but derives profits, interest, rental, royalties or other income from sources in China, or which, though it has an establishment or site in China and derives such income which however is not effectively connected with such e-statement or site, shall pay an Income Tax of 20% on such income.
(ZHU XI LING [45] 1991.4.9)
7.1.2 Profit, interest, rentals, royalties or other income′ referred to in Paragraph 1, Article 19 of the Tax Law shall be assessed on the full amount of taxable income, unless otherwise provided by the State.
(GUO WU YUAN LING [85] 1991.6.30)
7.1.3 Income obtained by the foreign enterprise from jointly issuing movies and TV programs in China with Chinese film producers, is income from copyright from sources inside China collected by the foreign enterprise who has no establishment or site in China. On such Income Tax shall be levied according to Article 19 of the “Income Tax Law on Enterprises with Foreign Investment and Foreign Enterprises”; while Income Tax shall not be levied on income from issuing movies and TV programs by the foreign enterprise outside China, which belongs to income from sources outside China.
(GUO SHUI FA [136] 1995.7.19)
7.2 Profit
7.2.1 Profits derived by a foreign investor in an enterprise with foreign investment shall be exempted from Income Tax.
(ZHU XI LING [45] 1991.4.9)
7.2.2 Profit mentioned in Article 19 of the Tax Law refers to income calculated according to the ratio of investment contributions or shares and other non-debt profit sharing rights.
(GUO WU YUAN LING [85] 1991.6.30)
7.2.3 derived by a foreign investor from an enterprise with foreign investment to in Item 1 Paragraph 3, Article 19 of the Tax Law refers to the profit made by an enterprise with foreign investment after deduction of the payment of Income Tax or reduced Income Tax, or the profit which is exempted from Income Tax, in accordance with the stipulations of the Tax Law.
(GUO WU YUAN LING [85] 1991.6.30)
7.2.4 Income from dividends
A. Income Tax shall not be collected on the dividends and extra dividends allocated to foreign investors from the profits made by enterprises with foreign investment or those allocated to foreign individuals by Chinese-foreign equity joint ventures according to the provisions of Article 19 of the “Income Tax Law of the People’s Republic of China on Enterprises with Foreign Investment and Foreign Enterprises” and Section 2 of Article 5 of the “Detailed Rules and Regulations for the Implementation of the Individual Income Tax Law of the People’s Republic China”.
B. Enterprise Income Tax and individual Income Tax shall not be levied, provisionally, on income from dividends (extra dividends) allocated to foreign enterprises and foreign individuals who have B shares and China¡¦s offshore shares by enterprises in China issuing B shares and offshore shares.
(GUO SHUI FA [045] 1993.7.21)
7.3 Interest
7.3.1 Interest refers to the following income received by foreign enterprises which have no establishments or sites in China: interest derived within China such as on deposits or loans, interest on bonds, interest on other provisional payments and deferred payments.
(GUO WU YUAN LING [85] 1991.6.30)
7.3.2 Income from interest on loans made to the Chinese Government or Chinese State banks by international financial organizations shall be exempted from Income Tax;
Profits derived by a foreign investor from an enterprise with foreign investment shall be exempted from Income Tax.
(ZHU XI LING [45] 1991.4.9)
7.3.3 International financial organizations refer to financial institutions like the International Monetary Fund, the World Bank, the Asian Development Bank, the International Development Association, the International Fund for Agricultural Development, etc.
(GUO WU YUAN LING [85] 1991.6.30)
7.3.4 Chinese State banks refers to the People¡¦s Bank of China, the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, the People¡¦s Construction Bank of China, and other financial institutions authorized by State Council to engage in the business of foreign exchange deposits and loans, etc. for foreign clients.
(GUO WU YUAN LING [85] 1991.6.30)
7.3.5 Regulations on Income Tax reductions and exemptions on interest income received by foreign businessmen from within China
A. Income Tax shall be levied at the reduced rate of 10% on the interest from loans, payments as loans and deferred payments within the duration of contracts according to the finance contracts and business contracts signed between 1983 and 1985 by foreign companies, enterprises and other economic organizations with Chinese companies.
B. The temporary exemption from Income Tax may be carried out on the following incomes from interest, in addition to the items stipulated in the “Detailed Rules and Regulations for the Implementation of the Income Tax Law on Foreign Enterprises”:
a. Income from interest derived from loans to China¡¦s national banks from foreign banks at the conventional call loan rate between international banks.
The above provision also applies to trust and investment corporations engaged in foreign exchange business, upon the approval of State Council or government bodies authorized by State Council.
b. Income from interest derived from loans to China Offshore Petroleum Corporation from foreign banks at a rate no higher than that of a call loan between banks.
c. Interest, derived from the seller¡¦s credit provided by the national bank of the seller’s country, paid by Chinese companies, enterprises and institutions in the form of deferred payment, at a rate no higher than that of the buyer’s credit in the seller’s country, to the seller of technology, equipment and commodities.
d. Interest obtained by foreign banks and foreign individuals from bank deposits in China¡¦s national bank whose deposit rate is lower than that of the foreign bank or that of the country where the depositor comes from.
e. Capital with interest repaid by Chinese companies or enterprises in the form of selling the products or providing the products to suppliers who sell the equipment and technology to Chinese companies or enterprises, or the capital with interest paid back in the form of processing charges obtained by the Chinese companies or enterprises from processing with imported materials.
C. Income Tax shall be levied at the reduced rate of 10%, within the duration of the contract, on the remaining part of the rentals obtained by deduction of the price of the equipment and the accessories provided between 1983 and 1985 by foreign leasing companies to Chinese companies or enterprises in the form of leasing trade.
Income Tax may be paid at 10% on the remainder from deduction of the interest covered in the lease rental if the loan agreement contract as well as the receipts and vouchers for the payment of interest can be presented and if they can fully prove that the interest rates satisfy the requirement in Section 3 of Article 2.
Income Tax may be exempt for lease rentals realized in the form of selling products or providing products to leasing companies.
D. If there is a need for exemption from Income Tax on interest from deposits, loans, payments as a loan and deferred payments as well as bonds in China, the relevant agreements, contracts and documents regarding the interest rate shall be presented by Chinese companies and enterprises, who absorb the deposit, accept the loan and the payment as a loan, conduct the deferred payment or issue bonds, to the local taxation authorities for examination and verification. An organization or individual is not permitted to enjoy the Income Tax exemption and reduction if the examination and verification is not carried out.
(CAI SHUI ZI [348] 1983.1.7)
7.3.6 Seller’s credit and buyer’s credit are the two forms of export credit. They are loans with lower interest rates, to which the interest subsidy is offered by the export country to support and enlarge its export, and to strengthen its international competition ability. The seller¡¦s credit is the credit, provided by the export side bank to the exporters, which shall be paid back in the form of deferred payment by the buyers. The buyer¡¦s credit, also called equipment loan, is the credit provided by the export side bank directly to the importers or import side bank. Therefore, the interest rate of the seller¡¦s credit should be the same as that of the buyer¡¦s credit, since both credits belong to the export credit of the export country.
(CAI SHUI WAI ZI [157] 1983.10.7)
7.3.7 The European Investment Bank belongs to the international financial institutions described in Article 19 of the “Income Tax Law of the People’s Republic of China on Enterprises with Foreign Investment and Foreign Enterprises”, therefore it may enjoy the tax incentives stipulated in that article (Article 19 refers to 7.1.1).
(GUO SHUI HAN [328] 1995.6.12)
7.3.8 Taxation on the interest on development investment loans of foreign oil companies
A. The contracted interest stipulated for the development investment made by foreign oil companies in the contract for Chinese-foreign cooperative exploration, development and production of oil is a method of allocation adopted to solve problems between the two sides regarding investment and product allocation. According to the provisions in CAI SHUI ZI [148] 1983 issued by the Ministry of Finance, the above-mentioned contracted interest is a part of the total income of the foreign oil companies from cooperative development of oil.
B. The interest expenditure actually occurring for loans obtained by foreign oil companies for investment may be categorized as expenses (or costs) at calculation of tax if the interest rate is found reasonable in examination and verification by the responsible taxation authorities according to the provisions of GUO SHUI YOU ZHENG ZI [8] 1989 concerning oil exploitation issued by the State Administration of Taxation.
C. Tax collection shall be carried out according to the different cases on the interest paid for the loans from the associated companies obtained by foreign oil companies engaged in cooperative development of oil resources. The interest payer shall withhold Income Tax according to the provisions of the Tax Law if the interest beneficiary has no establishment in China. Enterprise Income Tax shall be calculated and paid by the beneficiary of the interest according to the provisions of the Tax Law, if the beneficiary has an establishment in China, the interest collected by the beneficiary from the loans issued via the establishment shall be calculated into the beneficiary¡¦s income.
(GUO SHUI YOU ZHENG ZI [24] 1989.4.20)
7.4 Royalties
7.4.1 Income Tax on royalties received for the supply of technical know-how in scientific research, exploitation of energy resources, development of the communication industries, agricultural, forestry and animal husbandry production, and the development of important technology may, upon approval by the responsible department for tax affairs under State Council, be levied at the reduced rate of 10%. Where the technology supplied is advanced or the terms are preferential, exemption from Income Tax may be allowed.
(ZHU XI LING [45] 1991.4.9)
7.4.2 Reduction or exemption of Income Tax on royalties is applicable to the following:
A. Royalties obtained from the provision of the following technical know-how in farming, forestry, animal husbandry and fishery:
a. technology provided to improve soil and grassland, to reclaim and develop barren hills, and to fully utilize the natural conditions;
b. technology to nurture new species and varieties of fauna and flora and to produce high efficiency but low toxic agricultural chemicals;
c. technology to provide farming, forestry, animal husbandry and fishery with scientific production and management, to preserve the ecological balance, and to increase the capability of fighting natural disasters;
B. Royalties obtained from the provision of technical know-how to academies of science, colleges and universities, and other institutions of higher learning, scientific research or scientific experimentation;
C. Royalties obtained from the provision of technical know-how for the exploitation of energy resources and the development of communications and transportation;
D. Royalties obtained from the provision of technical know-how in energy conservation and the prevention and control of environmental pollution;
E. Royalties obtained from the provision of the technical know-how in the development of the following important fields of technology:
a. important advanced technology in the production of mechanical and electronic equipment;
b. nuclear power technology;
c. technology in production of large-scale integrated circuits;
d. technology in the production of photo-integration, micro-wave semi-conductors and micro-wave integrated circuits and micro-wave tubes;
e. technology in the manufacturing of high-speed electronic computers and micro-processors;
f. optical telecommunications technology;
g. remote ultra-high voltage direct current electricity transmission technology;
h. and technology for the liquefaction, gasification and integrated utilization of coal.
(GUO WU YUAN LING [85] 1991.6.30)
7.4.3 Clarification is given as follows regarding the Income Tax collection on income from copyright (derived inside China) of movies, audio products and audio-video products collected by foreign companies, enterprises and other organizations (hereinafter referred to as foreign enterprises) who do not have establishments in China
A. Income Tax shall be levied at the rate of 20% as stipulated in the Tax Law on income obtained by foreign enterprises from use of the copyright of movies, audio-video products and audio products provided by foreign enterprises to Chinese companies, enterprises and institutions (including TV stations, broadcasting stations, film distribution and projection companies and audio-video publishing houses) except those in the special economic zones, economic and technological development zones and coastal economic open zones where such Income Tax may be collected at the reduced rate of 10% according to the relevant provisions. Income Tax shall be withheld by the royalty payers from each payment.
B. As for the copy right of movies, audio-video products and audio products provided by foreign enterprises to be used in education, scientific research, environmental protection and medical care etc., if they are really helpful to the scientific and cultural communication between China and other countries and the royalties are relatively low, thus needing tax incentives such as tax exemption and reduction, the foreign enterprises may present application to the local tax authorities via the copyright purchasers and then the application shall be reported to the State Administration of Taxation for approval after examination and verification by the local taxation authorities.
C. If the foreign enterprise who provides copyrights of movies, audio-video products and audio products comes from a country with whom China has signed an agreement for prevention of double taxation, the foreign enterprise may ask for and enjoy the tax incentives on royalties at a limited rate according to the agreement.
D. The purchasers (companies, enterprises and institutions) of the copyrights of movies, audio-video products and audio products provided by the foreign enterprise shall withhold tax at each royalty payment according to the provisions of the Tax Law. The taxation authorities shall collect fines or surcharges for overdue tax payments according to the provisions of Article 14 and 15 of the “Income Tax law of the People¡¦s Republic of China on Foreign Enterprises”, if the tax is not withheld in time or the tax which should be withheld is not withheld.
(GUO SHUI HAN [960] 1990.8.3)
7.4.4 Taxation on income from patents and special technology
A. If an enterprise of China signs a license agreement or contract for transfer of exclusively owned technology with a foreign enterprise only to buy the right to use software, Income Tax shall be levied on patent royalties or on the charges for use of the technology with the technical service charge calculated in either of them. If the Chinese enterprise signs a contract for introduction of equipment to buy both software and hardware, Income Tax shall be levied from the foreign enterprise on all the technical service charges for implementation of the contract with the patent royalties or with the charges for use of the exclusively owned technology. The total technical service charge shall not include payments for equipment, components and parts nor raw materials.
B. Royalty payers shall withhold 20% of the Income Tax from the amount paid each time according to the provisions in Article 11 of the “Income Tax Law on Foreign Enterprises” on the income collected by foreign companies, enterprises or other economic organizations for providing all kinds of patent rights and know-how in China whether the purchasers make the payment once and for all, or by installments, in the form of entrance fees or in the form of revenue sharing.
C. Foreign trade corporations or the responsible authorities of the enterprises shall withhold Income Tax from the royalties paid to foreign enterprises to facilitate the administration where the foreign trade corporations or the responsible authorities of Chinese enterprises sign a technological trade contract with foreign enterprises instead of the user enterprises, who shall remit the payment for patent royalties and the charges for use of the exclusively owned technology to the foreign trade corporations or the responsible authorities of the enterprises according to the bills sent from them. Then, foreign trade corporations or the responsible authorities shall in turn go on to settle the account with and make the payment to the foreign enterprises.
(CAI SHUI ZI [109] 1982.5.8)
7.4.5 Calculating the tax levy on usage fees for special technology
A. The fees for blueprints and data, for technical services (including technical guidance and technical consultation) and for training collected by foreign enterprises for the use of know-how is a part of the expense stipulated in the technological trade contract which shall be calculated into income from use of know-how, and Income Tax shall be calculated and levied on this basis if a Chinese enterprise signs a technological introduction contract with the foreign enterprises to buy only the right to use the know-how.
B. Fees collected by foreign enterprises for civil engineering design and technological design for the installation and use of the equipment bought from abroad and fees collected for the blueprints and documents for manufacture and maintenance of the equipment provided by foreign enterprises shall not be calculated into the income from use of know-how, therefore Income Tax shall not be levied on such fees.
C. Income Tax shall be collected on income from use of know-how with the following charges completely calculated in, such as the charges for blueprints and documents provided for the use of know-how and the charges for the blueprints and documents provided for installation, use, manufacture and maintenance of the equipment, if the two kinds of charges cannot be separated clearly.
(CAI SHUI WAI ZI [143] 1982.10.14)
7.4.6 Taxation on the fee income received by foreign businesses supplying computer software
A. Income Tax shall not be levied on income from selling software by foreign enterprises if the right to use the software has not been transferred as patent right or copyright in the contract for purchase of computers and software from foreign enterprises, in this case, the software shall be regarded as a physical product attached to the computer. Income Tax shall be levied according to the provisions of the Tax Law on income from royalties collected by foreign enterprises from the transfer of the right to use the computer software, if the right to use the computer software is transferred as patent right or copyright (including special language, technological methods and technological secrets etc. for making computer application programmes), or the provisions are made to limit the use of transfer of the computer software.
B. Withholding tax shall not be levied on income from the design and development of computer software provided by foreign enterprises according to the specifications and technical requirements made by the Chinese side or on the income from the development and service cooperatively carried out by Chinese and foreign sides according to the provisions in Article 2 of Document No.326 issued by the Ministry of Finance (82), if the transfer of patent right or copyright of computer software is not involved; but if the foreign enterprises are those which have establishments or sites in China engaged in such services as contracting, design and development, tax shall be collected from them with reference to enterprises which have establishments in China engaged in a profit-making business.
(CAI SHUI WAI ZI [235] 1986.8.29)
7.4.7 The matter of taxation of the fees received from the usage rights for software supplied by a foreign business
A. Income Tax shall be collected on royalties, on income from the charge for the right to use computers collected by foreign enterprises, if foreign enterprises provide the right to use computer software in the form of a license for use of patent right or copyright or, although the right to use the computer software is not taken as patent right or copyright, there are provisions to limit the scope, form and duration for use of the software.
B. Income Tax shall not be levied on income obtained by foreign enterprises from transferring computer software to the users in China in forms other than providing the right to use the software and there is no provision to limit the use of the software. Tax shall not be levied from the foreign enterprises on such income, which may be taken as income from selling accessories.
(GUO SHUI HAN [304] 1994.6.14)
7.4.8 Withholding tax shall not be levied on interest and royalties collected by foreign enterprises if the charges on equipment, interest and royalties are all repaid in the form of products.
(CAI SHUI WAI ZI [132] 1987.5.25)
7.4.9 The question of the Responsible Department and the Relevant Department examining and approving imported technology projects
A. The responsible authorities responsible for the checking and approval of technological introduction projects and the relevant authorities in Article 3 of the Provisional Regulations refers to the Ministry of Foreign Economy and Trade and the local bureaus of foreign economy and trade authorized by the Ministry of Foreign Economy and Trade to be responsible for the checking and approval of the technological introduction projects (see list below).
B. If a foreign enterprise requests tax exemption and reduction according to the Provisional Regulations on royalties, the foreign enterprise shall present documents regarding tax exemption and reduction to the company or enterprise introducing the know-how and then the latter shall go through the application procedure instead of the foreign enterprise. The company or enterprise introducing the know-how shall present a report according to the documents provided by the foreign enterprise regarding tax exemption and reduction. The report shall be examined and verified by the Ministry of Foreign Trade and Economic Cooperation or the local bureaus of foreign economy and trade authorized by the (MOFTEC) who shall put forward the written comments on tax exemption and reduction. The written comments will be reported to the local taxation authorities along with such documents (including the documents provided by the foreign enterprise for tax exemption and reduction) as the agreements or contracts concerning introduction of know-how. The local taxation authorities shall conduct the examination and approval according to the stipulated responsibilities and procedures.
C. The taxation authorities shall not conduct the checking and approval of tax exemption and reduction on income from the right to use know-how if there is no foreign enterprise written application, no written comments provided by the Ministry of Foreign Economy and Trade or the local bureaus of foreign economy and trade authorized by the Ministry of Foreign Economy and Trade to be responsible for the checking and approval of technological introduction contracts on the basis of examination and verification of relevant documents or if there are no such documents as agreements or contracts for introduction of know-how.
Appendix
The list of the local bureaus (committees) of foreign economy and trade authorized by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) to be responsible for the examination and approval of technological introduction contracts
Committee of Foreign Economics and Trade, Beijing
Committee of Foreign Economics and Trade, Tianjin
Committee of Foreign Economics and Trade, Shanghai
Bureau of Foreign Economics and Trade, Hebei Province
Bureau of Foreign Economics and Trade, Shanxi Province
Bureau of Foreign Economics and Trade, Inner Mongolia Autonomous Region
Committee of Foreign Economics and Trade, Liaoning Province
Committee of Foreign Economics and Trade, Jilin Province
Bureau of Foreign Economics and Trade, Heilongjiang Province
Committee of Foreign Economics and Trade, Shanxi Province
Committee of Foreign Economics and Trade, Gansu Province
Bureau of Foreign Economics and Trade, Ningxia Hui Autonomous Region
Committee of Foreign Economics and Trade, Qinghai Province
Bureau of Foreign Economics and Trade, Xinjiang Uygur Autonomous Region
Committee of Foreign Economics and Trade, Shandong Province
Committee of Foreign Economics and Trade, Jiangsu Province
Committee of Foreign Economics and Trade, Zhejiang Province
Committee of Foreign Economics and Trade, Anhui Province
Bureau of Foreign Economics and Trade, Jiangxi Province
Committee of Foreign Economics and Trade, Fujian Province
Committee of Foreign Economics and Trade, Henan Province
Committee of Foreign Economics and Trade, Hubei Province
Committee of Foreign Economics and Trade, Hunan Province
Committee of Foreign Economics and Trade, Guangdong Province
Committee of Foreign Economics and Trade, Guangxi Zhuang Autonomous Region
Committee of Foreign Economics and Trade, Sichuan Province
Committee of Foreign Economics and Trade, Guizhou Province
Committee of Foreign Economics and Trade, Yunnan Province
Bureau of Economic Development, Shenzhen City,
Committee of Foreign Economics and Trade, Xiamen Cities
Bureau of Economic Development, Shantou Special Economic Zone
Committee of Foreign Economics and Trade, Zhuhai City
Committee of Foreign Economics and Trade, Dalian City
Committee of Foreign Economics and Trade, Yantai City
Committee of Foreign Economics and Trade, Qinhuangdao City
Committee of Foreign Economics and Trade, Qingdao City
Committee of Foreign Economics and Trade, Lianyungang City
Committee of Foreign Economics and Trade, Nantong City
Committee of Foreign Economics and Trade, Ningbo City
Bureau of Foreign Economics and Trade, Wenzhou City
Committee of Foreign Economics and Trade, Fuzhou City
Committee of Foreign Economics and Trade, Guangzhou City
Committee of Foreign Economic Development and Trade, Zhanjiang City
Committee of Foreign Economics and Trade, Beihai City??
Committee of Foreign Economics and Trade Administration, Chongqing City
Committee of Foreign Economics and Trade, Shenyang City
Committee of Foreign Economics and Trade, Xi¡¦an City
Committee of Foreign Economics and Trade, Harbin City
Bureau of Economic Cooperation, Hainan Province
Committee of Foreign Economics and Trade, Chengdu City
Committee of Foreign Economics and Trade, Nanjing City
Committee of Foreign Economics and Trade, Changchun City
(GUO SHUI FA [021] 1990.2.13)
7.4.10 Taxation on know-how introduction into special economic zones and coastal open cities
A. Tax shall be withheld by the foreign trade corporations in Beijing on payments of royalties to foreign enterprises for know-how introduction at the reduced rate of 10% on the royalties paid, via the foreign trade corporations in Beijing, by enterprises in special economic zones, economic and technological development zones, the old districts of coastal open cities and the districts of Shantou, Zhuhai and Yingkou cities except where tax exemption is approved.
B. Enterprises introducing know-how shall present requests to the local tax authorities for tax exemption and reduction on royalties paid for introduction of know-how from abroad. The local taxation authorities shall send the document of approval to Beijing Taxation Bureau and the corporations, which withhold the tax, as evidence.
(CAI SHUI WAI ZI [135] 1986.6.13)
7.5 Rentals
7.5.1 Income Tax is exempt, provisionally, on rentals obtained by foreign companies or enterprises who rent ships to Chinese companies or enterprises for international transportation. However, Income Tax shall be collected according to the provisions in Article 11 of the Tax Law for rentals obtained by foreign enterprises who rent ships to Chinese companies or enterprises for coastal or inland water transportation.
(CAI SHUI ZI [32] 1984.1.27)
7.5.2 Income Tax shall be paid by foreign enterprises according to the provisions of the “Income Tax Law on Enterprises with Foreign Investment and Foreign Enterprises” on income from rentals obtained by foreign enterprises who rent containers to enterprises in China. To facilitate the development of China¡¦s container oceangoing transport, Income Tax is exempt, provisionally, on income from rentals obtained by foreign companies or enterprises who rent containers to Chinese companies or enterprises for international transport taking into consideration the fact that the number of containers in China is not large enough to meet demand.
(GUO SHUI FA [049] 1993.3.12)
7.5.3 The matter of taxation of the equipment leasing income of foreign leasing companies
A. The lessees shall withhold 20% of the rentals as a withholding tax on the payment of rentals on income from the leasing service if the foreign enterprises do not have establishments in China or do not send employees to China to provide service.
B. Tax shall be levied in different ways on the sales and the leasing of equipment and tools carried out outside China by another foreign company to foreign oil companies engaged in exploration of offshore oil resources in China. Tax shall be exempt on the part of the sold equipment and shall be levied on the rented part of the equipment according to the relevant regulations on leasing.
C. Withholding tax shall be collected on income from services such as maintenance, checking and cleaning provided by the employees sent to China by the lessor. The Industrial and Commercial Consolidated Tax and Income Tax from foreign enterprises shall be levied on income from contributed work in the contractual project by the employees sent to China by the lessors according to tax regulations on contractors.
D. Expenses for transport of the equipment to and from the lessor to the lessee, and vice versa, shall not be categorized in income from the rentals of the lessor if the rentals are paid directly to the third party, in this case, the withholding tax shall not be collected. The withholding tax shall be collected on transportation expenses, if the expenses are categorized in rentals and are recorded in the invoice of the lessors, since in this case the expenses are regarded as part of the income from rentals.
E. If the lessors provide services carried out by the technicians from the lessors as well as provide the equipment, if the fees for accommodation, boarding and communications of the technicians are paid by the lessors and such fees are covered in the rentals, in this case, the lessees shall not deduct such fees at withholding of tax. If the lessors make the payment first, and then collect the fees from the lessees (whether in the form of invoices or in the form of receipts), in this case, such fees shall be categorized into income from rentals, on which the withholding tax shall be levied. If the fees are paid by the lessees directly to a third party, they shall not be categorized in income from rentals by the lessors, and no tax shall be levied.
(CAI SHUI YOU ZHENG ZI [1] 1985.1.11)
7.5.4 Tax Collection on rentals obtained by companies or enterprises from leasing machines and equipment in China.
A. Income Tax shall be collected, according to Article 11 of the Income Tax Law on Foreign Enterprises and the relevant regulations, on rentals derived from within China, in the case that the companies or enterprises outside China, who have no establishments in China, lease machines and equipment to lessees in China. Taxation shall be carried out, according to the relevant taxation agreements and CAI SHUI WAI ZI [042] 1985, concerning foreigners issued by the Ministry of Finance, on income obtained by companies or enterprises in countries whose governments have already signed taxation agreements with China¡¦s government and whose agreements have already come into force.
B. Industrial and Commercial Consolidated Tax and Enterprise Income Tax shall be levied, with reference to tax collection from the enterprises engaged in production or operation in China, on income from rentals from sources within China if companies or enterprises outside China have establishments in China and lease equipment and machines via the establishments to the lessees in China.
(CAI SHUI YOU ZHENG ZI [13] 1985.6.8)
7.6 Benefits Received from Transfer of Property
7.6.1 Other income referred to in Paragraph 1 and 4, Article 19 of the Tax Law includes gains from alienation of property including houses, buildings, structures and their attached facilities located in China or from the assignment of land use rights.
Gains from alienation of property referred to in the preceding paragraph means the balance of the transfer proceeds after deduction of the original value of the said property. In the event that proper evidence on the original value of the property cannot be provided by a foreign enterprise, the local tax authorities shall assess the original value of the property according to the specific conditions.
(GUO WU YUAN LING [85] 1991.6.30)
7.6.2 Taxation on income from the transfer of stock ownership by investors of wholly foreign owned enterprises and the foreign party of the Chinese-foreign equity joint ventures.
Income from stock ownership transfer refers to the excess part of transfer gains over the investment obtained by the foreign party of Chinese-foreign equity joint ventures and investors from wholly foreign-owned enterprises from transfer of their stock ownership of the enterprises. The withholding tax shall be levied at 20% of the excess part according to the relevant regulations.
(CAI SHUI WAI ZI [033] 1987.2.22)
7.6.3 Income Tax shall be exempt, provisionally, on the net income obtained by foreign enterprises from transfer of their own B shares or Chinese offshore shares issued by enterprises in China if the B shares or Chinese offshore shares do not belong to the foreign enterprise¡¦s establishments or sites in China and the tax exemption also applies to the income of foreign individuals from transfer of their own B shares or Chinese offshore shares issued by enterprises in China.
If foreign enterprises and foreign individuals transfer the stock ownership of the enterprises with foreign investment in China, on the excess part of the transfer gains over the investment, the withholding tax or the Individual Income Tax shall be levied at 20% on the excess part according to the provisions in Document No. 033 concerning foreigners issued by the Ministry of Finance (87) and in Document No.114 issued by the Ministry of Finance (84).
(GUO SHUI FA [045] 1993.7.21)
7.6.4 With the development of China¡¦s Chinese-foreign cooperative exploitation of offshore oil resources, some foreign oil companies assign part or all of their interest in the contracts signed with China to other companies. The problems are clarified as follows regarding tax collection concerning such assignment of interests:
A. Enterprise Income Tax shall be paid according to the provisions in the Tax Law on the remainder, which shall be the taxable income of the enterprise, from the deduction of the exploration expenses and development investment expenditures already occurring in the contract area from income obtained by the foreign companies from assignment of part or all of their interests in the contracts signed with China.
B. The amortization and depreciation shall be carried out, according to the “Detailed Rules and Regulations for the Implementation of the Income Tax Law on Foreign Enterprises” and relevant regulations, for expenses on the assigned interests in oil contracts paid by foreign companies as assignees on the basis that such expenses may be regarded as the assignees¡¦ exploration expenses and development investment expenditures occurring in the contract area.
C. At the declaration of the Enterprise Income Tax, any exploration expenses and development investment expenditure having occurred before assignment of the interests in the contract area shall not be calculated into the expenses of the foreign companies who are assigned with or achieve the interests of the oil contracts free of charge.
D. The provisions in the above Sections. A,B,C also apply to the assignment of interests in the oil contracts between associated companies if there is no tax evasion found by the taxation authorities through examination and verification.
E. The foreign company shall present relevant agreements, documents, etc. regarding the assignment of interests in the contracts to the taxation authorities for examination and verification, if the foreign company assigns or is assigned the interests in the contracts in China.
(GUO SHUI FA [027] 1990.2.27)
7.6.5 Taxation on the foreign oil company¡¦s assignment of interest in the contracts
A. The remainder from deduction of the exploration expenses and the development investment expenditures occurring in the contract area from the income obtained by the foreign oil company by assignment of part or all of its interests in the oil contract in China shall be the taxable income of the company, on which Enterprise Income Tax shall be declared and paid according to the provisions in the Tax Law.
B. The amortization and depreciation shall be carried out according to the Detailed Rules and relevant regulations for expenses on the assigned interests in oil contracts paid by foreign oil companies as assignees on the basis that such expenses may be regarded as the assignees¡¦ exploration expenses and the development investment expenditures occurring in the contract area.
C. On calculation of Enterprise Income Tax, any exploration expenses and development investment expenditures having occurred before the assignment or achievement of the interest in the contract area shall not be calculated into the expenses of the foreign oil companies who are assigned or obtain the interest in the oil contracts free of charge.
D. The relevant agreements and documents shall be presented to the responsible taxation authorities within one month after assignment of the contract interest when the assignment of the interest in the oil contracts are carried out by foreign oil companies.
E. Taxation regarding the assignment of the interest in oil contracts in China between associated enterprises may be carried out according to the above provisions.
(GUO SHUI FA [191] 1991.11.27)
7.7 Forms of Tax Levy
7.7.1 For the payment of Income Tax in accordance with the provisions of the preceding paragraph, the income beneficiary shall be the taxpayer and the payer shall be the withholding agent. The tax shall be withheld from the amount of each payment by the payer. The withholding agent shall, within 5 days, remit the amount of taxes withheld on each payment to the State Treasury and submit a withholding Income Tax report to the local taxation authorities.
(ZHU XI LING [45] 1991.4.9)
7.7.2 The payment mentioned in Paragraph 2, Article 19 of the Tax Law refers to payments in cash, by remittance, or through transfer accounts, as well as payment made in the form of non-monetary assets or rights and interests for an equivalent amount of money.
(GUO WU YUAN LING [85] 1991.6.30)
7.7.3 Apart from the aforesaid provisions of this Article, if preferential treatment in the form of reduction of or exemption from Income Tax on profits, interest, rental, royalties and other income is required, it shall be decided by State Council.
(ZHU XI LING [45] 1991.4.9)
7.7.4 Procedures for administration of reductions and exemptions from provisional income tax on foreign enterprises
A. Dividends
Income Tax shall be exempt on the profit (dividends) collected by foreign investors from enterprises with foreign investment according to the provision in Item 1 of Section 3 of Article 19 of the Tax Law. There is no need for the enterprise with foreign investment to withhold Income Tax when allocating and paying the profit (dividends) and there is also no need for checking and approval to be carried out.
B. Interest
a. Income Tax may be exempt directly by the government bodies or national banks engaged in payment of interest obtained by international financial institutions which give loans to China¡¦s government and China¡¦s national banks, however, the relevant agreements and documents regarding the loans shall be presented to the local taxation authorities for their record.
b. For the interest obtained from China by foreign governments or financial institutions owned by foreign governments, if, according to the taxation agreement signed by China with the foreign government, Income Tax shall be exempt by China, the taxpayer shall present proof of his identity to the local taxation authorities in the location of the interest payer. The interest payer shall be instructed not to withhold Income Tax by the local tax authorities who shall conduct examination and verification according to the taxation agreement.
c. For the following interest, Income Tax shall be exempt, however, the interest receiver shall make application or the interest payer entrusted in written form shall make application, and the application with the relevant agreements, contracts etc. shall be presented to the local taxation authorities in the location of the interest payer for checking and approval according to the provisions in Article 5 of CAI SHUI ZI [348] 1983 issued by the Ministry of Finance, and copies of the checked and approved documents shall be presented to the State Administration of Taxation.
I. the income from interest derived from loans provided by foreign banks at the preferential interest rate to China¡¦s national banks or financial institutions;
II. the interest from the deferred payment paid by China at the interest rate no higher than that of the buyer¡¦s credit of the country from which China¡¦s companies, enterprises and institutions have bought technology, equipment and goods with the seller’s credit provided from that foreign country;
III. the interest obtained by the seller of technology and equipment, if the capital with interest derived from purchase of technology and equipment by China¡¦s company or enterprise is paid back in the form of selling or providing the products to the interest receiver or in the form of processing or assembling with imported material.
d. If the interest rate of the debenture denominated in foreign currency issued by China¡¦s national banks or financial institutions outside China can meet the requirement of the preferential interest rate, and there is a need for application for exemption from Income Tax, the issuer of the debenture may apply directly to the State Administration of Taxation and present copies of the applications to the local taxation authorities. Exemption from Income Tax shall be carried out by the tax authorities in the relevant provinces, autonomous regions, municipalities directly under the central government or separate planning cities when the necessary documents are received from the State Administration of Taxation who has made the check and approval of the application.
e. Taxation shall be carried out on the interest from the loans provided by foreign banks directly to State-owned enterprises and enterprises with foreign investment in China according to the Tax Law and the relevant regulations. As for those who are eligible for the tax exemption and reduction, either the debtor or creditor may apply for tax exemption and reduction. The application shall be sent to the State Administration of Taxation by the local taxation authorities to the higher levels step by step after the examination and verification is conducted by the particular local taxation authorities, except where tax exemption and reduction may be decided directly by the relevant People¡¦s Government of the province or the city according to the corresponding regulations made by State Council.
f. The preferential interest rate mentioned in 7.7.4 and in Item 3 of Section 3 in Article 19 of the Tax Law shall be modified regularly by the State Administration of Taxation with reference to fluctuations in the international financial market.
C. Rent from financing leases
If the foreign leasing companies who have no establishments in China, provide equipment to the users in China in the form of a financial lease, the rental payer shall withhold Income Tax on the remainder, obtained by deduction of the interest from the balance, i.e., remaining part, obtained by deducting the equipment price from the rentals collected by the foreign leasing company for the equipment provided, if the interest rate the lessor gets is proved, by examination and verification of the local tax authorities on the loan agreements, receipts and vouchers for the interest payment, to be no higher than that of the export credit of the lessor¡¦s country.
D. Royalties
a. If tax incentives regarding Income Tax exemption and reduction need to be applied on the know-how royalties listed in Item 4 in Section 3 of Article 19 in the Tax Law, the know-how transfer-in side entrusted by the transfer-outside shall present the relevant documents regarding application and contract to the local taxation authorities for examination and verification according to Article 19 of the Tax Law. The application shall then be presented by the taxation authorities to those at higher levels step by step to the State Administration of Taxation for approval, except where the People¡¦s Governments in the relevant provinces and cities have the right to make the decisions according to the corresponding regulations of State Council.
b. For know-how provided by foreign enterprises, not previously listed in Item 4 of Section 3 in Article 19 of the Tax Law, if the know-how is introduced for major projects approved by State Council or for key projects listed in the State development plan, the exemption from or reduction of Income Tax shall be carried out on those advanced in technology and introduced upon terms favourable to China. In this case, the know-how transfer-in side entrusted by the transfer-out side shall present the relevant documents such as applications and contracts to the local taxation authorities for examination and verification. The application shall then be presented to the State Administration of Taxation for approval.
c. The relevant documents regarding applications and contracts to be presented to the local taxation authorities for examination and verification mentioned in the above two sections consist of:
I. the application for tax exemption and reduction presented by the know-how transfer-out side or the letter of entrustment for tax exemption and reduction entrusted to the know-how transfer-in side by the know-how transfer-out side;
II. the application for tax exemption and reduction presented by know-how transfer-in side;
III. the proposal for tax exemption and reduction made by the responsible economics and trade departments responsible for checking and approval of the know-how introduction project;
IV. the contracts and agreements regarding know-how transfer;
V. the documents for approval of the contracts and agreements regarding know how transfer.
(GUO SHUI FA [055] 1993.8.2)