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China's State Administration of Taxation (SAT) has issued tax circular Guo Shui Han [2009] No. 507 that tightens the "Tax Treaty Treatment of Royalties.”

According to KPMG China, the circular, which will take effect October 1, 2009, covers all sectors and encompasses corporate income taxes. The potential impact on businesses is that the compliance risks due to regulatory uncertainties will be lessened, says KPMG China.

In the circular, the SAT clarifies those royalties for use of industrial, commercial  or scientific equipment do not include income from use of immovable properties, and that information concerning industrial, commercial or scientific experience refers to proprietary technologies.

According to KPMG, service fees for providing support and guidance for use of proprietary technologies under transfer or licensing of such technologies will be treated as royalties if the services do not constitute permanent establishment. However, if the services constitute permanent establishment, income from these services will be treated as business profits.

Meanwhile, income from specific services fees for pure after-sales services for goods, services provided by sellers to buyers during warranty period, professional services, and similar rewards stipulated by SAT, will be generally treated as business profits rather than royalties, explains KPMG.

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