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China Simplifies Tax Treaty Benefits Process

Non-resident individuals or companies may obtain Double Taxation Avoidance Treaty withholding tax benefits related to China-sourced active and passive income.

The Chinese State Administration of Taxation (SAT) has released a long-awaited change to the process by which non-resident individuals or companies may obtain Double Taxation Avoidance Treaty (DTAT) withholding tax benefits related to China-sourced active and passive income. This latest set of regulations has been promulgated as SAT Announcement [2019] Number 35, which took effect on January 1, 2020. Regulatory goals include streamlined tax administration and improved convenience for non-resident taxpayers.

Under the previous regulation, non-residents with China-sourced income were subject to domestic taxation rules by default, without regard to existence of a DTAT. Upon making cross-border payments to a non-resident, the payor was required to act as “withholding agent”, automatically withholding relevant tax and paying it to the in-charge tax bureau. In cases where the non-resident’s country and China had executed a DTAT that offers withholding tax exemption or reduction, a lengthy DTAT benefits application and approval process was required. If approval was not applied for or granted prior to remitting payment to the non-resident, the payor had to withhold the applicable tax. And if approval was then granted after payment was remitted, the payment recipient could file an application for a tax refund with the in-charge tax bureau.

As of January 1, 2020, payments to non-residents will no longer default to China’s domestic taxation regulations, nor will DTAT benefit approvals be required. Given that the non-resident or withholding agent submits a “Statement of Entitlement to Tax Treaty Benefits” at the time withholding tax would otherwise be declared and paid, withholding tax exemption or reduction will apply as specified in the relevant DTAT. The non-resident must maintain documentation in evidence of DTAT applicability to the specific transaction, and must also submit the documents to tax authorities upon request. If no statement of entitlement is submitted, the transaction becomes subject to tax withholding as per current practices. Where a transaction is deemed subject to withholding tax after payment has already been made to the non-resident, the tax must be paid up in full within the prescribed time period.

While Announcement 35 changes will no doubt simplify DTAT related matters for non-residents and withholding agents alike, non-residents should obtain professional analysis of DTAT applicability to their transactions, as well as a listing of the evidentiary documentation that should be prepared and kept on file. And lastly, since many regulatory changes take months or longer to become common practice, non-residents receiving payments from China may need local assistance to educate payors on these new procedures.

 

CONTACTS
For more information, please contact:

Flora Luo
Director of Global Expansion & Tax Advisory
Nexia TS Shanghai
floraluo@nexiats.com.cn

Dr Scott Heidecke
Senior Consultant
Nexia TS Shanghai
scott@nexiats.com.cn

 

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