The payment of service fees, interest, royalties and dividend shall be subject to a tax withholding mechanism and declared with the tax authority (regulatory basis: article 37 of the Corporate Income Tax law). If the payment is above USD 50,000, the Chinese payer shall complete the requested tax formalities and obtain the tax filing notice from the tax bureau before making the bank remittance (regulatory basis: STA and MOF Public Announcement [2013] No. 40).
Recently, the State Taxation Administration (“STA”) has stipulated a couple of tax circulars which introduce changes to the tax treatment pertaining to the settlement of the above mentioned items. We hereby summarize the noteworthy points for your reference as follows:
- Starting from 1 September 2021, the Chinese payer is NOT required to withhold the surcharges when withholding VAT for its payment of service fees, interest and royalties.
The above-mentioned “surcharges” generally refer to three types of miscellaneous taxes and charges, i.e., the urban maintenance and construction tax, education fee and local education fee. Those surcharges are currently calculated based on the amount of VAT and consumption tax payment with an aggregate rate ranging from 6% to 12%. Starting from 1 September 2021, those surcharges are not applicable to the import of services, interest and royalties.
According to the Urban Maintenance and Construction Tax Law (President Decree No. 51, “Circular 51”) which takes effect on 1 September 2021, the VAT and consumption tax paid for the import of goods, services or intangible assets are not subject to urban maintenance and construction tax (regulatory basis: article 3 of Circular 51).
On 28 August 2021, the Ministry of Finance (“MOF”) and the STA have jointly stipulated a regulatory circular (MOF and STA Public Announcement [2021] No. 28, “Circular 28”) to further clarify the implementation of Circular 51. According to Circular 28, the above principle in calculating the urban maintenance and construction tax shall apply in a consistent way to the calculation of the education fee and local education fee (regulatory basis: article 2 of Circular 28). In other words, the import of goods, services or intangible assets is not subject to the calculation of the education fee and local education fee.
- Starting from 29 June 2021, the put-on-record filing formalities are further simplified when making multiple payments under the same contract.
On 29 June 2021, the STA and the State Administration of Foreign Exchange (SAFE) have jointly stipulated a regulatory circular (STA and SAFE Public Announcement [2021] No. 19, Circular 19). According to Circular 19, for multiple payments under the same contract, the Chinese entity is only required to conduct the put-on-record filing for the first payment that reaches the USD 50,000 threshold.
In view of the above, the Chinese entity’s filing formalities will be simplified when making the subsequent payments under the same contract, which were required to conduct the put-on-record filing whenever the single payment reaches USD 50,000 (regulatory basis: STA and SAFE Public Announcement [2013] No. 40). Kindly note that the above rule is only about the filing procedure for multiple payments under the same contract. The tax declaration and payment obligation shall be assessed based on the relevant tax rules and are not exempted due to the simplified process.
- Starting from 29 June 2021, the foreign investor’s dividend reinvestment in China is NOT required to conduct the put-on-record filing with the tax authority.
As stipulated in Circular 19, the dividend reinvestment by the foreign investor is NOT required to be filed with the tax authority starting from 29 June 2021. To give you more background in this regard, starting from 1 Jan 2018, the foreign investor, when using its dividend derived from the Chinese subsidiary to reinvest in China (including setting up new FIEs or the capital increase to the existing subsidiaries), can claim a deferral of the payment of the withholding income tax (“WHT”). Before the promulgation of Circular 19, the dividend reinvestment was required to be filed with the tax authority of the Chinese entity which distributes the dividend to the foreign investor (regulatory basis: STA Public Announcement [2018] No. 53). You may consider approaching the competent tax authority to confirm the local practice and properly keeping the supporting documents internally in case of a review by the tax authority.
If you have any questions of the above or need further information, please feel free to contact us.
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Eloise Yao
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