How to Gain Tax Treaty Benefits in China

by Lloyd Deverall, Ayesha Macpherson, Chris Abbiss and Vaughn Barber, KPMG, 10 January 2010

0 comments

Facebook

Digg

Twitter

topics:
Accounting and Regulations Tax

tags:
beneficial owner Circular 601 corporate income tax Notice 124 State Administration of Taxation tax treaty benefits

Following the introduction of the Corporate Income Tax law in the People’s Republic of China, PRC tax authorities have been more closely scrutinising non-residents claiming tax treaty benefits.

As part of what appears to be an on-going effort, the State Administration of Taxation recently issued Notice 124 (Administrative Measures on Tax Treaty Relief Claims by Non-Residents in the PRC -- Guoshifa [2009] No.124) and Circular 601 (Interpretation and Determination of “Beneficial Owner” Under Tax Treaties -- Guoshuihan [2009] No. 601), which provide for certain reporting and threshold requirements for overseas investors to qualify for tax treaty benefits.

Claiming Tax Treaty Benefits

Prior to the introduction of Notice 124, a company incorporated in Hong Kong generally only needed to produce a copy of its Certificate of Incorporation in Hong Kong or a Certified Extract of Information on the Business Register to the PRC tax authorities to prove their Hong Kong resident status to claim tax benefits under the Hong Kong-PRC tax treaty. In some instances, the PRC tax authorities require a Certificate of Resident Status from the Inland Revenue Department. Apart from these procedures, no further information was generally required by the PRC tax authorities for obtaining tax treaty benefits.

Notice 124, which came into effect on 1 October 2009, applies to all non-resident companies (and non-resident individuals) claiming tax treaty benefits. Notice 124 has introduced pre-approval procedures and detailed disclosure requirements for non-residents claiming tax treaty benefits on dividends, interest, royalty and capital gains derived from the PRC. However, non-residents claiming treaty protection in connection with any permanent establishments they may be considered to have need only provide the information for reporting purposes and may therefore adopt a filing position without the need for pre-approval from the PRC tax authorities.

The information required to be disclosed with respect to claiming preferential tax rates on payments made from the PRC includes:

details of shareholders of the non-resident company who hold at least 10% of the shares in the company who are not from the PRC or the relevant non-resident jurisdiction;
tax treatment of the income in the jurisdiction in which the non-resident company is incorporated;
copies of property certificates, contracts, agreements, invoices and other ownership certificates relating to the income derived;
major operations and businesses of the non-resident company;
total amount of gross income of the non-resident company;
number of employees in the non-resident company; and
details of related party transactions undertaken by the non-resident company with entities outside the PRC and the relevant treaty jurisdiction.

Who Qualifies as ‘Beneficial Owner’?

It is a requirement under tax treaties concluded between PRC and other jurisdictions that the recipient of dividend, interest and royalty income must be the “beneficial owner” of such income to enjoy reduced rates of withholding tax on such income paid from the PRC.

Circular 601, issued by the State Administration of Taxation on 27 October 2009, provides guidance on how to determine whether a non-resident applicant qualifies as the “beneficial owner” of PRC-sourced income for the purpose of obtaining treaty relief.

Circular 601 specifies that the “beneficial owner” should carry out substantial business activities and own or have control over the income, rights or assets which give rise to such income. Specifically, agents and conduit companies will not be regarded as the “beneficial owner” of such income.

Comment on this article

Accounting and Regulations

CFO innovation Asia Accounting and Regulation the Asia Pacific resource center for senior finance executives, daily news, analysis, best practice and case studies in Accounting Regulation, IFRS, US GAAP, Tax, investor relations, corporate governance, Corporate Law, Financial Regulators, Internal Audit, Audit, Corporate Law.

Auditing, Investor Relations, Law and Compliance, Tax

Finance and Banking

CFO innovation Asia, Finance and Banking the Asia Pacific resource center for senior finance executives, daily news, analysis, best practice and case studies in Corporate Finance, trade finance, treasury and risk management, capital expenditure, Banking, mergers and acquisitions

Cash and Liquidity Management, Corporate Finance, Insurance, Treasury Management

Management

CFO innovation Asia the Asia Pacific resource center for senior finance executives, daily news, analysis, best practice and case studies in Finance Management, Corporate Governance, Human Resource Management, Compensation and Benefits, Mergers and Acquisitions, Professional Development, Corporate Real Estate, Risk Management, Budgeting and Forecasting, Business Process Management, Business Process Reengineering, Outsourcing.

Budgeting and Planning, Business Expense Management, Human Capital Management, Outsourcing and Shared Services, Risk Management

Metrics

Corporates, Financial Services

Technology

CFO innovation Asia Technology the Asia Pacific resource center for senior finance executives, daily news, analysis, best practice and case studies in Finance Systems, Business Intelligence, EPR, Accounting software, CRM, Cloud Computing, Telecommunications, Business Process Outsourcing, Business Process Management Software.

Business Intelligence, Enterprise Software and Systems, Financial Systems, Security

CFO innovation ASIA