China Clarifies Corporate Income Tax Treatment for Non-Resident Enterprises Under VAT Reform

China’s State Administration of Taxation (SAT) clarifies that, under the value-added tax (VAT) pilot reform,  VAT should be excluded from taxable income such as dividends, bonuses, and royalty fees derived by non-resident enterprises, according to an announcement concerning the corporate income tax (CIT) treatment for non-resident enterprises in the VAT pilot reform.


The announcement specifically addresses income originated from China and earned by non-resident enterprises with no establishment presence in China, or enterprises with an establishment in the country but obtaining income that has no actual connection with the establishment.


For certain services, such as technology transfers and trademark copyright transfers, the prices paid are considered royalty fees. Prior to the pilot reform, the taxable income was considered as the full amount of the royalty fees including the 5 percent business tax (BT).


Under the pilot reform, non-resident enterprises who provide such services to companies in China are now subject to 6 percent VAT.


The announcement makes it clear that, within the pilot areas, the taxable income of the royalty fees should exclude the VAT amount.


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