Q: When will the PRC Enterprise Income Tax Law (the EIT Law) come into force?
A: The EIT Law will come into force on 1st January 2008.
Q: Is there any change in the scope of income tax?
A: The old PRC Tax Law for Foreign Investment Enterprise and Foreign Enterprise (the FIE tax law) set out two conditions for the determination of tax residence: (i) place of incorporation and (ii) place of management and control. Tax residence is subject to tax on worldwide income. Tax residents shall pay tax on worldwide income. The EIT Law retains the two conditions in the FIE tax law, but the place of incorporation and place of management and control is changed from “and” to “or”. Article 2 and Article 3of the EIT Law provide that the resident enterprise shall be the one that is incorporation in China OR if it is incorporated outside China, of which the effective place of management is located within China. All resident enterprises shall be taxed on worldwide income.
Q: What is the implication of the change in tax rules?
A: The scope of tax net will be larger than before. The impact of the change in the EIT Law will affect foreign enterprises either that have registered a fixed place of business in China, or that have not officially registered but effectively maintained a place of business in China. Previously these types of taxpayer are only subject to tax on PRC-source income. Under the new EIT Law if the management and control is located in China, the foreign enterprise will be liable to tax on worldwide income. One example of this is the representative office that carries out management and control over business activities across border. Most of these representative offices are set up by Hong Kong companies to take advantage of lower labor and land costs in the Mainland of China.
答：新稅法擴大了原來的徵收管轄範圍。稅法改動對在中國境內已註冊及設立了固定經營場所的外國公司，或者在中國境內未有正式註冊但設立了固定經營場所的外國公司，都有直接影響。在之前，該類外 國公司只需要就來源於境內收入交納所得稅。新稅法規定倘若外國公司或企業的管理控制中心設在中國境內，就要按其境內外收入徵收所得稅。外國公司的辦事處在境內管理或控制其總機構的生產經營業務 就是例子之一。很多香港公司為了減省人力和土地成本，在大陸境內設立了代表處跨境管理其總機構的生產經營業務。
Previously non-PRC companies will not exposed to PRC income tax on worldwide income since it is not incorporated in China. The EIT Law will change the status quo as from 2008. It not only takes into consideration the place of incorporation, but also takes into consideration the location of the management control in China. A non-PRC company may be subject to tax on worldwide income under the EIT Law.
|Old tax law|
|1. Country of incorporation|
2. Management control
|Both rule 1 and 2|
|Either rule 1 or rule 2|
Q: Are there any change in the income tax rate?
A: The EIT Law will impose tax on FIE at a rate of 25%. Non-resident taxpayers that earn PRC-source income will be taxed at 20%, subject to the reduction under PRC tax treaties in force.
Q: Is there any change to the tax rules that impose tax on dividend income?
A: Yes, the dividend distributed by FIE will be subject to tax at 20%. If there is a tax treaty concluded between China and the country of which the investor is a tax resident, the tax rate will be reduced to 10% in most cases (Hong Kong company is only taxed at 5%).
Q: How is the tax computed on dividend, interest and royalty that is distributed by the FIE to the foreign investors situated outside China?
A: The distribution of dividend, interest and royalty is subject to income tax on a gross basis (without deduction for any expenses incurred in connection with the earning of that income). The tax is withheld at source at the time of payment.
Q: What are the tax rates that apply to the payments of dividend, interest and royalty?
A: The withholding income tax rate is at 20%, subject to the unilateral reduction by the Chinese government and the applicable tax treaties. For Hong Kong holding companies that receive payments from PRC WFOE the following tax rate shall apply:
Up to 1st Jan 2007 2007年1月1日前
|Nature of Payment|
The PRC Income Tax Law for Foreign Invested Enterprises and Foreign Enterprises (the PRC IT Law for FIE and FE) exempts the income tax on the distribution of dividends to the holding company situated outside China.
1st Jan 2007 to 31st Dec 2007 2007年1月1日至2007年12月31日
The DTA between HKSAR government and the Mainland government came into force on 1st January 2007. Between 1st Jan 2007 and 31st Dec 2007, the repatriation of dividend from China to Hong Kong is exempted from WIT. But the repatriation of royalty and interest will be liable to WIT at 7% because of the operation of the DTA between HKSAR and Mainland China.
|Nature of Payment|
1st Jan 2008 and onwards 在2008年11日之後
The PRC Enterprise Income Tax Law (the EIT Law) will take effect on 1st January 2008. The PRC IT Law for FIE and FE will be repealed on the same date. The EIT Law removes the income tax exemption on the repatriation of dividend. However, the operation of the DTA can reduce the withholding income tax (the WIT) on the repatriation of dividends.
|Nature of Payment|
Suppose that the WFOE in Shanghai is to pay a software licensing fee of 100 to HK Company, the computation of withholding income tax and business tax will be as follows (assuming that the WIT rate is 10%, and business tax rate is 5%.):
Business Tax營業稅: 100 x 5% = 5
Withholding Income Tax預提稅: (100 – 5) x 10% = 9.5
Total tax will be稅款總額 = (BT 營業稅+ IT預提稅) = 5 + 9.5 = 14.5
Note that the amount of business tax is deductible from the gross payment when the WFOE computes the income tax.
Q: Our company has used BVI Companies as the investors for the FIE. Will this legal structure be affected?
A: It will be affected adversely under the EIT Law. BVI is not a sovereign state, and it has not entered into any tax treaty with China. Therefore, the investor will be subject to 20% (that may be unilaterally reduced by China to 10%) withholding income tax on dividends to be received from subsidiaries in China.
Q: What steps should be taken to reduce the withholding income tax rate?
A: Your Company should effect a re-organization by replacing the BVI Company with a HK company (or other company of a PRC treaty country) as the holding company. The re-organization will be exempted from income tax under the tax law before 2007. It is uncertain whether the tax exemption will be available after the EIT comes into force on 1st January 2008. One has to wait for the detailed implementation regulations as promulgated by the State Council or the interpretations as issued by the Ministry of Finance or State Administration of Taxation.
Before re-structure: Holding company → BVI Co → WFOE
After re-structure: Holding company → HK Co → WFOE
重組前：最終控股公司 → BVI 公司 → 獨資企業
重組後：最終控股公司 → 香港公司 → 獨資企業
Q: What about the tax on disposal of landed properties by non-residents?
A: The tax rules for the disposal of assets are different from what we have mentioned above. The EIT Law permits the deduction of the cost of the asset and other tax expenses from the sales proceeds. The amount that represents the excess of sales proceeds over the cost of the asset is subject to income tax. The payer inside China has the legal obligation to withhold the income tax before paying the seller situated outside China.
By China Tax & Investment Consultants Ltd