Taxes and tax advisory || Topics || Ebner Stolz Asia

New COVID Situation in China: Tax Relief Policies Released to Support Small and Medium-sized Enterprises and Small-scale and Low Profits Enterprises

In the context of the recent rebound of the epidemic situation in China, Chinese government introduced a series of tax relief policies to lighten the burden especially for Small and Medium-sized Enterprises and Small-scale and Low Profits Enterprises. We prepared a summary of these policies which were published in the first quarter of 2022.

Reduced CIT rate for Small-scale and Low Profits Enterprises

According to Announcement [2022] No. 13 of the Ministry of Finance and the State Taxation Administration, from January 1, 2022 to December 31, 2024, the annual taxable income for Small-scale and Low profits Enterprises, which exceeds CNY 1 million but does not exceed CNY 3 million, is further reduced by 50% for CIT.

As stipulated in Cai Shui [2019] No. 13 and Announcement [2021] No. 12 of the Ministry of Finance and the State Administration of Taxation, the existing tax relief policies for Small-scale and Low Profits Enterprises are as follows: if the taxable income does not exceed CNY 1 million, the taxable income is computed at 12.5% of the taxable profit and is subject to CIT rate at 20% (i.e., the effective tax rate is 2.5%). If the taxable income exceeds CNY 1 million but does not exceed CNY 3 million, the taxable income is computed at 50% of the taxable profit and is subject to CIT rate at 20% (i.e., the effective tax rate is 10%).

Policies Relating to Income Tax Deduction for Equipment and Instruments of Small and Medium-sized Enterprises

According to the Announcement [2022] No. 12 of the Ministry of Finance and the State Taxation Administration, for equipment and instruments that are newly purchased by Small and Medium-sized Enterprises during the period from 1 January 2022 to 31 December 2022 with a unit value of CNY 5 million or above, and if the minimum depreciation period is 3 years, i.e. electronic equipment, 100% of the unit value could be deducted on a one-off basis for the current year. For equipment and instruments with a minimum depreciation period of 4, 5 or 10 years, i.e. fixed assets except electronic equipment and buildings, 50% of the unit value could be deducted for the current year, and the remaining 50% could be depreciated in the remaining years pursuant to the provisions for income tax deduction.

This new policy encourages to promote their equipment update and technology upgrade.

Continued Implementation of the Deferred Payment of Certain Taxes and Levies by Small and Medium-sized Enterprises in Manufacturing Industry

According to the Announcement [2021] No. 30 of the State Taxation Administration, Small and Medium-sized manufacturing enterprises could enjoy 3-month deferral for the tax payments of the fourth quarter of 2021.

Medium manufacturing enterprises with an annual sales amount of between (including) CNY 20 million and (excluding) CNY 400 million may defer payment of 50% of the taxes mentioned above for the first two quarters of 2022. Micro and small-sized manufacturing enterprises with an annual sales amount of less than CNY 20 million can defer the payment of all taxes mentioned above for the first two quarters of 2022.

Further Implementation of “Six Taxes and Two Surcharges” Relief Policy for Micro and Small Enterprises

From January 1, 2022 to December 31, 2024, small-scale VAT payers, Small-scale and Low Profits enterprises and individually-owned businesses enjoy a reduction of Six Taxes and Two Surcharges within the range of 50%, which includes resource tax, urban maintenance and construction tax, property tax, urban land use tax, stamp duty (excluding stamp duty on securities transactions), arable land use tax, education surcharge and local education surcharge. The specific tax reduction rate is determined by the local government.

Further Implementation of VAT Credit Refund Policy for Small-scale and Low Profits Enterprises and Manufacturing Industries

Before April 2019, it is generally not permitted refund any input VAT credit to taxpayers in China except the input VAT credit which is related to the cost of exported goods (please refer to our article “VAT Refund for Export Business in China” dated August 28, 2018). From April 2019, the incremental VAT credit accumulated after the end of March 2019 could be refunded. Excess input VAT accumulated before the March 31, 2019 cannot be refunded under the previous policies.

Incremental VAT credit refund is further increased to manufacturing, scientific research and technical services, ecological and environmental protection, electricity and gas, transportation and other related industries. The existing VAT credit of medium manufacturing enterprises could be refunded in lump sum by 30 June 2022.

Announcement on Matters Relating to the Exemption of Small-Scale Taxpayers from Value-Added Tax

Based on Announcement [2022] No. 15 of the Ministry of Finance and the State Taxation Administration and Announcement [2022] No. 6 of the State Administration of Taxation, effective from April 1, 2022, during the period from 1 April 2022 to 31 December 2022, which are subject to VAT levy rate at 3% are exempted from VAT. Items that are subject to VAT prepayment at pre-levy rate of 3% are suspended from VAT prepayment.

Unless the taxpayers opt for waiving the benefit of VAT exemption, tax-free invoices for the corresponding sales income shall be issued in accordance with the regulations.

“Small-scale VAT payers” refer to those enterprises whose annual turnover is below CNY 5 million and which do not voluntarily register as general VAT payers. The small-scale VAT payers pay output VAT at 3%, but cannot claim input VAT credits on purchases.

We advise Small and Medium-sized Enterprises or Small-scale and Low Profits Enterprises in China to review their financial results and assess whether they are eligible to enjoy the above mentioned tax benefits.

How can we help you?

Dr. Gerald Neumann

Managing Partner

China Recent Transfer Pricing Regulation Update

Multinational enterprises (MNEs) generally need to prepare a transfer pricing documentation to assess whether their transfer pricing arrangements for intercompany transactions are in line with the arm’s length principles. In 2021, the economies in most countries were gradually recovered but were still impacted by the coronavirus (COVID-19) pandemic. As such, MNEs need to consider potential transfer pricing planning opportunities that may help reducing the tax risks caused by the pandemic. We hereby summarize the recent transfer pricing updates in China.

1. Simplified procedures for unilateral APAs

With the development of the OECD’s base erosion and profit-shifting (BEPS) plan, many taxpayers incline to reach a long-term agreement with the tax authority to manage the tax uncertainty, i.e. advance pricing arrangements (APAs). On 26 July 2021, the State Taxation Administration (STA) released guidance (STA Public Notice [2021] No. 24) regarding the simplified procedures for unilateral APAs.

Under STA Public Notice [2021] No. 24, the procedures for unilateral APAs are simplified from original 6 stages to 3 stages and set a timeline of “90 days + 6 months” for the approval. This means that the tax authorities shall perform on-site interview, conduct evaluation and notify the taxpayer whether the application is accepted within 90 days from receiving the application documents. Upon accepting the application, the negotiation and signing shall be completed within next 6 months.

According to China APA Annual Report 2020 issued by the STA, China has signed a total of 116 unilateral APAs and 90 bilateral APAs from 2005 to 2020. The number of signed APAs in recent years has been increasing rapidly. We expect that more enterprises will apply for APAs to offer more tax certainty for cross-border related party transactions after the implementation of simplified procedures for unilateral APAs.

2. FAQs on Anti-Avoidance During the Pandemic Prevention and Control released by the STA

In September 2021, following the OECD’s “Guidance on the Transfer Pricing Implications of the COVID-19 Pandemic”, the International Taxation Department of the STA released the “FAQs on Anti-Avoidance During the Pandemic Prevention and Control”, which offers guidance on five transfer pricing questions, including transfer pricing investigation, losses arising from the impact of the pandemic, preparation of the TP documentation, the impact of government subsidies granted due to the pandemic and advance pricing arrangements.

Due to the different impacts of pandemic on different industries and enterprises, some Chinese subsidiaries may earn higher profits than routine years and some may earn lower profits or incur losses. In response to the above questions, China tax authorities emphasize that the arm’s length principle shall be adopted during the transfer pricing investigation. If there are additional costs or operating expenses incurred due to the pandemic, the impact shall be considered in comparability analysis. When preparing the transfer pricing documentation, the specific impacts of the pandemic on related party transactions, value chains, etc. shall be analyzed.

If the enterprises believe that government subsidies have an impact on transfer pricing arrangements, relevant information shall be provided in the transfer pricing documentation to support the comparability analysis.

In the event that the implementation of the signed APAs is substantially affected by the epidemic, the details shall be reported to the tax authority and it is possible to terminate or amend the signed APAs.

We suggest taxpayers considering how to respond to transfer pricing challenges arising from the pandemic.

For further information or assistance, please feel free to contact us:

Dr. Gerald Neumann

Partner

Email: gerald.neumann@cn.ebnerstolz.com

Eloise Yao

Director

Email: eloise.yao@cn.ebnerstolz.com

Important Note: Tax incentives on annual bonus and foreigner’s fringe benefits continue to be valid until 2023!

On 31 Dec 2021, the Ministry of Finance (“MOF”) and the State Taxation Administration (“STA”) have jointly stipulated two regulatory circulars (Circular 42 and Circular 43) to extend the following tax incentives to year 2023, mainly including:

Annual bonus can be separately taxed from the basic salary using the preferential IIT calculation method;
Tax free treatment of the benefits in kinds reimbursed to foreigners
Preferential tax treatment to the equity incentives provided by listed companies

Before the stipulation of those two circulars, those preferential IIT treatment were supposed to be abolished on 1 Jan 2022, in accordance with MOF and STA Public Announcement [2018] No. 164 (“Circular 164”). We prepared a newsletter dated 6 September 2021 about the impact of Circular 164. The contents discussed in that newsletter are subject to change now.

Circulars 42 and 43 are regarded as the New Year gift from the Chinese government to the employees working in China. However, if you had already planned for certain changes to the employment contracts, we suggest you conduct an immediate review and consider if it is necessary to make any updates.

If you have any questions of the above or need our further assistance, please feel free to contact us!

How can we help you?

Dr. Gerald Neumann

Managing Partner

Carry out business activities throughout China – Are you well prepared for the branch registration?

On 27 July 2021, the State Council of the People’s Republic of China published the “Administrative Regulation on the Registration of Market Participants” (State Council Order No. 746), which will come into effect on 1 March 2022. The regulation now standardizes a unified registration obligation for all types of market participants as well as their branches in China. The term of “market participants” is defined as the natural persons, legal persons and unincorporated organizations that engage in profit-oriented business activities in the People’s Republic of China.

According to the regulations, a market participant shall only register one domicile or main business premise as a basis for the business registration. A market participant may render services or carry out business activities outside its registered place in a different province or city. If such activities reach a certain level, the market participant shall file the business registration of a branch.

If a company (or other type of market participant) fails to file for branch registration in accordance with the regulations, the local authorities (i.e., Administration of Market Regulations, in brief “AMR”) have right to order the company to complete the branch registration or to close the unlicensed business operation. It can also impose on the company a penalty up to CNY100,000 or, if the operation adversely impacted society or human safety up to CNY500,000.

However, the critical level at which branch registration becomes necessary is not clearly defined in the available rules. Since the end of 2020, the local AMR authorities have been increasingly taking action against companies that hire field staff for purpose of business operations in the locations without officially registered branches. Recently, some companies are requested by the local authorities to register a branch for any business activities outside the company’s registered place. According to our opinion, once the company rents an office in a different city, then the company shall register a branch.

According to the tax administration rules, upon the completion of the branch registration with AMR, the branch shall file its registration with the tax authority. The tax authority will assess the applicable taxes of the branch and determine the routine tax filing formalities to be fulfilled by the branch.

Although the branch registration is not a new requirement provided by State Council Order No. 746, we estimate the local authorities would intensify their administration on branches registration in their jurisdictions. We suggest you review your business activities in China (particularly services and sales activities) that are carried out by your staff located outside the registered address of your headquarter and seek professional advices from your advisors regarding the legal and tax implications of the branch office registration.

Please feel free to contact us if you need further information or assistance.

How can we help you?

Lena Li

Corporate Services Manager

Coming changes to the Individual Income Tax treatment on expatriates in China

On 27 Dec 2018, the Ministry of Finance (“MOF”) and the State Taxation Administration (“STA”) have jointly stipulated a regulatory circular to clarify the Issues Relating to the Transition of Preferential Policies following the Revision of the Individual Income Tax Law (MOF and STA Public Announcement [2018] No. 164, “Circular 164”). According to Circular 164, two favorable tax policies that have been applicable to the expatriates for a long time will become invalid starting from 1 Jan 2022.

Tax free allowances

Currently, the expatriates working in China can enjoy the individual income tax (“IIT”) exemption on certain benefits-in-kinds provided that those benefits are actually incurred with reasonable amounts and are reimbursed to the employees based on valid tax invoices (regulatory basis: Caishui [1994] No. 20). Applying the above preferential tax treatment, the expatriates in China can benefit from a lower tax rate than the Chinese domiciled individuals who are at the same remuneration levels. For your easy reference, those tax-free benefits generally include:

1. rental allowances;
2. meal allowances and laundry expenses;
3. language training allowance;
4. children school fees;
5. home visit expenses (two flights per year of the employee from hometown to China);

Starting from 1 Jan 2022, the foreigners working in China will not be eligible to claim IIT exemption on the tax free benefits (regulatory basis: article 7.2 of Circular 164).

Following the abolishment of the preferential tax treatment, the foreigners can claim the itemized deductions stipulated by the IIT law if those foreigners stay in China for 183 days and above in a calendar year. Considering the itemized deductions shall be limited to the qualified scope and subject to the corresponding deduction limit, the expatriates cannot benefit a lot from the itemized deduction. For example, the deduction limit of the rental expense is RMB 18,000 per year per family in Shanghai, the deduction limit of the children school fee is RMB 12,000 per year per child.

Annual Bonus

According to Circular 164, if an expatriate’s stay time in China reaches the 183-day threshold in a calendar year, he is eligible for a preferential tax treatment on his annual performance bonus. To be specific, the annual bonus will be taxed separately from the other employment income at an applicable IIT rate that is determine by 1/12 of the bonus amount. Such preferential tax treatment on annual bonus will become invalid starting from 1 Jan 2022. The foreigners who stay in China for 183 days and above in a calendar year shall include the annual bonus to his annual income to determine the annual IIT burden (regulatory basis: article 1.1 of Circular 164).

Unless the STA stipulates other preferential rules, the above changes stipulated by Circular 164 will obviously increase the overall tax burden on the employment income derived by the expatriates in China starting from 2022. Considering there are only four months left in 2020, we consider the following measures would help the employer and the employees to get well prepared for the coming changes:

review the existing remuneration structure,
estimate the potential change to the overall tax burden and
Consider the possible ways to manage the cost increase (e.g., allocation of the cost increase).

If you have any questions of the above or need our further assistance, please feel free to contact us.

How can we help you?

Yvonne Zhang

Senior HR and Administration Manager

Noteworthy changes of the tax implications to the cross-border remittance of services fees and other non-trade items

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.

How can we help you?

Eloise Yao

Director Tax

Tax incentives for Small-scale and Low-profit Enterprises are extended to year 2021

Since 1 Jan 2019, small-scale and low-profit enterprises that are not engaged in industries prohibited or restricted by the State and that meet the following conditions:

taxable profit for the year shall not exceed RMB 3 million;
employees shall not exceed 300;
assets shall not exceed RMB 50 million;

can enjoy certain tax incentives (regulatory basis: Caishui [2019] No. 13, or “Circular 13”).

On 7 April 2021, the State Taxation Administration (“STA”) has issued a new notice which further reduced the Corporate Income Tax (CIT) burden for the small-scale and low-profit enterprises during the period from 1 January 2021 to 31 December 2022. According to the tax circular (STA Public Notice [2021] No. 8), the CIT for small scale and low profit enterprises is calculated as follows:

For the part of the profit within RMB 1 million: effective CIT rate 2.5% (i.e., 12.5% * 20%);
For the exceeding amount (i.e., the profit above RMB 1 million but not higher than 3 million): effective CIT rate of 10% (i.e., 50% * 20%).

In view of the above, the small-scale and low-profit enterprises are subject to CIT at maximum 7.5% during 1 Jan 2021 to 31 Dec 2022. If the qualified enterprise’s total profit does not exceed RMB 1 million per year, the effective CIT burden will be 2.5%.

We advise the smaller enterprises in China to review their financial results and assess whether they are eligible to enjoy the above mentioned tax benefits. In addition to CIT, a enterprises classified as small scale VAT payer are exempted from VAT, provided that the revenue does not exceed RMB 150k per month (valid from 1 April 2021 to 31 December 2022). Kindly note that such VAT exemption does not apply to the enterprises that have obtained the general VAT payers status (i.e., general VAT payers are the type of VAT payers that can claim the input VAT credit against the output VAT).

Please feel free to contact us if you need further information or assistance.

How can we help you?

Eloise Yao

Director Tax

Social Insurance Administration Tightened in Beijing from Mid of 2020

On 30 June 2020, the Beijing social insurance authority released a strict local policy to tighten its social insurance administration in Beijing. Pursuant to this policy, effective from 5 July 2020, all HR agencies registered in Beijing are no longer allowed to pay social insurance in Beijing for employees who are hired by companies registered in other cities or dispatch employees to companies registered in other cities (local transition periods may apply though). Now, the government requires the HR agencies to stop the affected services, conduct internal review and take corrective actions.

The policy is not a change of social insurance law, but a signal for the stricter implementation of law. In the past, the employees based in Beijing may want to pay social insurances in Beijing to meet the criteria stipulated for household registration, house buying, etc. Many HR agencies are able to pay social insurance for those employees in Beijing on behalf of the companies, without considering whether those companies have legal registration in Beijing. Although this may not be fully compliant with the social insurance law, it has been tolerated by many social insurance authorities for rather a long time.

In view of the above, we suggest you have an internal review to know whether you are affected by the above policy. If the above policy applies to you, it is critical to find alternative solutions for your employees based in Beijing as soon as possible. Failing to do so may cause disruption to social insurance and tax filing for the affected employees and may lead to high risks in tax and social insurance compliance in China.

Please feel free to contact us if you need further information or assistance.

How can we help you?

Yvonne Zhang

Senior HR and Administration Manager

Legal Representative and Bank Account Opening

According to our observation, more banks require now the actual presence of the legal representative during bank account opening in the respective branch in China. Before, banks often agreed to have the statutory interview with the legal representative by video which seems now to be obsolete.

We were informed that this new practice is based on a recent instruction by the Chinese central state bank.

With regard to the ongoing travel restrictions due to the Covid 19 outbreak, the regulation is particularly inconvenient for such overseas invested companies which keep the legal representative at the headquarter.

Some branches of foreign banks in Shanghai currently still accept that account opening applications are submitted by another person who has been formally authorized by the legal representative, and only request that the original passport of the legal representative is presented to the bank. However, foreign banks may be quite selective with regard to the opening of new corporate accounts.

How can we help you?

Lena Li

Corporate Services Manager

Tax Planning for Small-scale and Low-profit Enterprises during the 2019 Year-end Closing

On 17 January 2019, the State Taxation Administration (“STA”) and the Ministry of Finance (“MOF”) released a new announcement regarding the tax reduction policy for Small-scale and Low-profit Enterprises (“Cai Shui [2019] No. 13”). Cai Shui [2019] No. 13 is valid from 1 January 2019 to 31 December 2021.

In this newsletter, we have summarized the tax reduction policy stipulated by Cai Shui [2019] No. 13 for your reference, as well as our suggestions about the issues to be considered during your year-end closing.

1. Background

According to Cai Shui [2019] No. 13, during the period of 1 January 2019 to 31 December 2021, a small-scale and low-profit enterprise can compute its taxable income at a reduced rate of the taxable profit before applying the 20% enterprise income tax rate. To be specific, if its revenue does not exceed RMB 1 million, the taxable income is computed at 25% of the taxable profit (i.e., the effective tax rate is 5%). If the revenue exceeds RMB 1 million but does not exceed RMB 3 million, the taxable income is computed at 50% of the taxable profit (i.e., the effective tax rate is 10%).

The above-mentioned “small-scale and low-profit enterprises” are defined as those entities that having taxable profit no higher than RMB 3 million, staff no more than 300 person and assets no higher than RMB 50 million.

2. Issues to be considered during your 2019 Year-end closing

Referring to the tax reduction policy mentioned above, we suggest you take the following actions to check whether your accounts have been properly kept for 2019 and whether you are eligible to claim the tax reduction policy as a small-scale and low-profit enterprise:

Check and ensure the accruals have been properly booked (e.g. Dec reimbursement, unpaid audit fee for 2019, unpaid salary & annual bonus for 2019, etc.);
Check the retained earnings and ensure the amount agree with last year’s audited report;
Follow up the inter-company reconciliations;
Ensure the financial accounts of inventory agree with physical inventory list;
Ensure the goods in transits can be tied with the commercial invoice sent by head office in the latest months;
Obtain the bank statements and check with the trial balance (during year-end closing, suppose no reconciliations);
Check the foreign exchange valuation for monetary assets and liabilities;
Check the long-aging receivables and liabilities and confirm with clients. If it is necessary to charge to P/L, please make adjustment;
Accrual of enterprise income tax and prepare the supporting filing documents;
Ensure no revenue cut off mistake;
Relevant supporting documents for year-end accruals shall be obtained in order to present a true and fair financial statement.

3. Summary

To summarize the above, in order to claim the tax relief stipulated by Cai Shui [2019] No. 13 on a timely basis, all small-scale and low-profit enterprises need to pay more attention to their year-end closing to make sure the revenue and expenses are properly accounted in order to justify the claim of the tax relief policy.

If you have any questions regarding the above, please feel free to contact us.

China Simplifies the Tax Procedure Regarding Non-Resident’s Claim of Treaty Benefits Regarding Dividend Payments

On 14 October 2019, the State Taxation Administration (“STA”) released a new announcement to further optimize its tax administration regarding granting treaty benefits to non-residents (STA Announcement [2019] No. 35, “Announcement 35”).

Announcement 35 will take effect on 1 January 2020. Simultaneously, the existing administrative rules stipulated by STA in 27 August 2015 (STA Announcement [2015] No. 60, “Announcement 60”) will be repealed.

In this newsletter, we have summarized the main amendments introduced by Announcement 35 for your reference.

1. Background

To avoid double taxation on cross-border transactions and encourage the cross-border investment, China has concluded the Double Tax Agreement (“DTA”) with 107 countries. Compared with the domestic tax law, those DTAs generally provide a much favorable tax treatment for non-resident taxpayers. For example, the Chinese affiliate is required to withhold 10% income tax on dividend paid to its overseas parent company. Pursuant to the relevant DTA (such as the DTA between China and Germany), the withholding income tax rate can be reduced to 5%.

Non-resident taxpayers are required to fulfill certain formalities with the Chinese tax authority in order to claim the corresponding tax exemption or reduction according to the DTA clauses (i.e., the claim of the treaty benefits). Before the stipulation of Announcement 60, non-resident taxpayers shall apply for pre-approval on the treaty benefits with the Chinese tax authority.

Pursuant to the existing guidance in Announcement 60, non-resident taxpayers can directly claim based on their self-assessment results without seeking pre-approval from the competent tax authority.

Following the revocation of the pre-approval process, the existing Announcement 60 requires the non-resident claimants of treaty benefits or their withholding tax agents (“WHT agent”, normally the payer of income) to file extensive supporting documents with the tax authority to prove those claimants’ eligibility to the treaty benefits. Considering the above filing shall be completed before applying the treaty benefits to the tax declaration, the tax and payment process could practically be delayed by the documentation work.

Now, the tax authority stipulated Announcement 35 to optimize the procedural work, which could further simplify the tax formalities but put higher demand on taxpayer’s tax compliance.

2. Main changes introduced by Announcement 35

Announcement 35 now emphasizes the non-residents shall claim the treaty benefits by way of “self-assessment” of the eligibility to the treaty benefits and shall assume the corresponding responsibilities. Following this principle, Announcement 35 requires the non-residents to properly keep the supporting documents with themselves (normally 10 years) in case of any potential review or tax inspection by the tax authority.

To claim the treaty benefits, the non-resident taxpayers shall fill in an “Information Reporting Form for Non-resident Taxpayers Claiming Treaty Benefits” (“Information reporting form”) and submit this form to the tax authority, along with the tax declaration form. If there is a withholding agent (either the statutory withholding agent or a designated withholding agent), the non-resident taxpayer shall proactively submit the above “Information Reporting Form” to its withholding agent.

Compared with the reporting forms stipulated in Announcement 60, Announcement 35 simplifies the Information Reporting Form into one page to collect the high-level information relevant to the claim of the treaty benefits, as well as the non-resident taxpayer’s statement on assumption of the corresponding legal responsibilities and the signature.

Another change alters the WHT agent’s tax exposure. Compared with Announcement 60, Announcement 35 does not require the WHT agents to collect the complete materials (the old reporting forms and supporting documents) from the non-residents, or to ensure the information filled in the forms correspond to the relevant treaty clauses. Announcement 35 now makes it clear that, the WHT agent’s responsibility is to obtain the new “Information Reporting Form” from the non-resident taxpayer and to check whether the non-resident taxpayer has completely filled in the form. If the information reporting form is obtained and all the requested areas are filled in, the WHT agent can apply the treaty benefits to the withholding tax declaration. Otherwise, the WHT agent shall refer to the domestic tax law to the withholding tax declaration.

In addition to the above changes, most other provisions under Announcement 35 are similar to those under Announcement 60, such as using the contracts / agreements, board resolutions, and tax residence certificates as supporting documents, the refund of overpaid tax if the non-resident fails to claim the treaty benefits for the tax declaration/withholding, etc.

3. Summary

To summarize the above, on the one hand, the new administrative measure introduced by Announcement 35 is an encouraging improvement regarding the claim of treaty benefits, which will help reducing the administrative burdens and speed up the tax declaration / bank remittance process.

On the other hand, the previous requirements on filing of all the proof documents with the tax authority could provide a certain level of confidence to the non-resident taxpayers regarding their self-assessment results. Pursuant to Announcement 35, the non-residents are fully responsible for the accuracy, completeness and authentication of the information reported to the tax authority, and an improper claim of DTA benefits would impair its credit with the Chinese tax authority. Therefore, the non-resident taxpayers will face a high demand on the tax assessment of the eligibility to treaty benefits as well as the corresponding documentation.

If you have any questions regarding the above, please feel free to contact us.

How can we help you?

Eloise Yao

Director Tax

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Eloise Yao

Director Tax

Value Added Tax Reformation in China

On 5th March 2019, the Premier of China released a government work report at the 13th National People’s Congress and announced further tax reductions. In terms of VAT, tax rates shall be reduced. The reduction scope is as follows:

Taxable transaction	Applicable VAT rate
Taxable transaction	Before	After
Sales and importation of general goods; provision of processing, repair and replacement services; and provision of leasing services of tangible and moveable assets	16%	13%
Sales and importation of specified goods; provision of transportation, postal, basic telecom services, construction services and leasing services of immoveable property; and sales of land use rights or immovable property	10%	9%
Provision of value-added telecom services, financial services, modern services and lifestyle services; and sales of intangible assets other than land use rights	6%	6%

We will keep you updated once further information has been released.The enforcement time of the VAT reduction is not yet determined. We expect that the State Administration of Taxation will issue a regulation after the National Congress and release more details in this aspect.

Final Implementation Law for Individual Income Tax

On 22 December 2018, China’s State Council released the final implementation regulations for the amended Individual Income Tax (IIT) law (Decree of the State Council No. 707). Draft implementation regulations were released for consultation by the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) on 20 October 2018. We have summarized several changes made to the draft regulations regarding to resident and non-resident tax payers as follows:

Non-resident taxpayers

“Five-year rule” to “Six-year rule”

The five-year rule has been adjusted to six-year rule and foreign employees can avoid paying taxes on worldwide income as a Chinese resident. Although residence will be triggered based on 183 days, a single break in excess of 30 days will continue to create a “tax break” for these purposes.
The eligibility for the exemption on foreign sourced income may need to be validated through a “put-on-record” filing.

Tax-exempt benefits will be retained

Foreign employees can elect to retain the tax-exempt benefits privilege they currently enjoy. Foreign employees cannot enjoy double benefits from expenses incurred of the same nature under both the non- taxable benefits rules and the specific additional deductions rules.

Resident taxpayers

Itemized deductions

The new IIT law allows resident individuals to claim six types of additional itemized deductions against their comprehensive income to compute IIT. The final implementation regulations confirm that the additional itemized deductions may be taken when computing IIT on business income to the extent the individual does not have any comprehensive income.
Individuals will be required to submit the information relating to itemized deduction claims for first time declaration to their tax withholding agent or tax bureau, and any subsequent changes should also be notified to the employer.
Unclaimed tax deductible expenses incurred in current year cannot be carried over to the following year.

Please see the special deductions breakdown as follows:

Item	Key qualifying conditions		Amount for deduction (RMB)	Who can claim?	Supporting Documents
Children’s education	Pre-school	3 years onwards	1000/month/child	100% for either parent or 50%/50% by both parents	Only for children receiving education overseas: admission notice, student visa etc. No requirement for children accepting education in China.
	Compulsory education	Primary & middle school
	Intermediate education	High school, Vocational school
	Higher education	Degree, Masters, Doctorate
Further education	Formal education in China	As per above levels of education	400/month (max. 48 months for one formal education)	Individual taxpayers Exception for individual that has work but accepts education lower than bachelor degree: by parent or the individual	No requirement for formal education. For professional education: professional certificate.
Further education	Professional education	Recognized qualification or certificate in China	One-off 3,600 in the year obtaining qualification /certificate
Serious illness medical fees	Medical expenses incurred for individual taxpayer, spouse or minor children after the reimbursement by statutory medical insurances in aggregate more than RMB 15,000		Actual expenses in part of exceeding 15,000 but less than 80,000 (deduction shall be claimed at the annual IIT reconciliation of the following year)	Medical fees for taxpayer or spouse: either by taxpayer or spouse Medical fees for minor children: either party of the parent	Original or photo copy of receipts for medical service charges, vouchers for statutory medical insurance reimbursement, list of annual medical expenses issued by medical insurance institute etc.
Housing loan interest	Bank loan or housing fund for buying real property in China Limited to first property only		1000/month (max. 240 months)	If jointly owned, either husband or wife to claim	Loan agreement and vouchers for re-payment of loan etc.
Housing rent	Not owning property in place of work No claim of housing loan interest deduction by the taxpayer or spouse	Specified big cities^[1]	1500/month	If husband and wife work in the same city, only one side that sign the agreement can claim If husband and wife work in different cities and not own property in either city, both and claim deduction of own	Rental agreement
		Cities with population in urban districts > 1m	1100/month
		Cities with population in urban districts < 1m	800/month
Supporting elderly	60 years or older parents as well as grandparents aged 60 and above whose child(ren) has/have passed away	Taxpayer is the only one child	2000/month	For taxpayer with siblings: split between siblings: maximum claim is 1,000 per month for each	Agreement for the allocation among siblings

[1] Specified big cities include Beijing, Shanghai, Tianjin, Chongqing, Shenzhen, Xiamen, Ningbo, Qingdao, Dalian and the capital cities of all provinces.

Cumulative Withholding Method on the Monthly Individual Income Tax

Starting from January 2019, the monthly calculation of the individual income taxes of your employees will change. The tax rate will no longer be just based on the amount of the taxable salary of the current month. Instead, in each month the cumulated amount of taxable salary in the current year is determined and the applicable tax rate is based on this cumulative amount. The details of the calculation method are stipulated in the Announcement of the State Administration of Taxation on Promulgation of the Administrative Measures on Declaration of Individual Income Tax Withholding (Trial Implementation), Article 6:

Tax amount to be withheld by the employer for the current period = (taxable income amount subject to cumulative withholding × withholding rate – quick calculation deduction) – cumulative tax credit – cumulative withheld amount
Taxable income amount subject to cumulative withholding = cumulative income – cumulative tax-exempt income – cumulative deduction expenses – cumulative special deductions – cumulative special additional deductions – cumulative other deductions determined pursuant to the law

The new calculation method implies that for many employees, the applied tax rate will increase at certain month during the year, i.e. the net salary received by the employee will decrease at the same time, as illustrated in the following example. To avoid confusion it may be necessary to explain this to the employees in advance.

Example:

An employee has a monthly gross salary of RMB 15,000 and the employee’s monthly contribution for social security and housing fund is RMB 2,450. The monthly lumpsum deduction is RMB 5000. Assume that the employee is further entitled to special deductions for the children’s education, housing and support for the elderly in the amount of total RMB 2,000 per month and there is no other reduction or exemption of income and tax exemption. For January to July 2019, for example, the withholding tax for each month should be calculated according to the following method:

January: Taxable income = 15,000 – 5,000 – 2,450 – 2,000 =RMB 5,550; x Tax rate 3% = RMB 166.5

February: Taxable income = 15,000×2 – 5,000×2 – 2,450×2 – 2,000×2 = RMB 11,100; x Tax rate 3% = RMB 333; less tax credit from previous months RMB 166.5 = 166.5 RMB;

July: Taxable income = 15,000×7 – 5000×7 – 2,450×7 – 2,000×7 = 38,850; x Tax rate 10% = RMB 3,885; less quick calculation deduction 2,520 = RMB 1,365; less tax credit from previous months RMB 166.5×6 = RMB 366;

The tax rates are based on YTD income according to the following table. In the example, it can be seen that from January to June, the cumulated taxable income is below the threshold of 36,000 RMB and the applied tax rate is 3%. In July, when the cumulated taxable income exceeds the threshold, the tax rate changes to 10%. Accordingly, the after tax income of the employee in this example will be higher in the period January-June and the decrease in July.

Individual income tax rates (applicable for consolidated income)

Grade	Annual taxable income amount	Tax rate (%)	Quick Calculation Deduction
1	RMB36,000 or less	3	0
2	The part exceeding RMB36,000 and up to RMB144,000	10	2,520
3	The part exceeding RMB144,000 and up to RMB300,000	20	16,920
4	The part exceeding RMB300,000 and up to RMB420,000	25	31,920
5	The part exceeding RMB420,000 and up to RMB660,000	30	52,920
6	The part exceeding RMB660,000 and up to RMB960,000	35	85,920
7	The part exceeding RMB960,000	45	181,920

Implementation Rules of Preferential Tax Deduction Policy for Small Low-Profit Enterprises and Small Scale Tax Payers

On January 17, 2019, the Ministry of Finance and the State Administration of Taxation (“SAT”) released the “Notice on implementing the preferential tax deduction policy for small low-profit enterprises” (Caishui [2019] No.13). The implementation period of this notice is from January 1, 2019 to December 31, 2021.

We have summarized several key points of this implementation for small low-profit enterprises as follows:

1. Small-scale Tax Payers:

	Conditions	Small-scale Tax Payers
Value-added Tax	< RMB 100,000	Exempted

The sales amount for sale of goods, labor services, services and intangible assets does not exceed RMB100, 000 shall be exempted from VAT.

2. Small low-profit enterprise:

	Conditions	Small low-profit enterprises
Corporate Income Tax	The portion of annual taxable Income < RMB 1 million	The portion of annual taxable Income25%20%
Corporate Income Tax	The potion of annual taxable income > RMB 1 million, but < RMB 3 million	The portion of annual taxable Income50%20%

Notes: regardless if a small low-profit enterprise pays enterprise income tax by way of levying based on accounts examination or levying based on assessment, the enterprise may enjoy the aforesaid incentives.

The small low-profit enterprises shall satisfy three criteria:

Annual taxable income amount does not exceed RMB 3 million
Staff headcount does not exceed 300
Total assets do not exceed RMB 50 million

The stated number of employees and total assets should be determined based on the quarterly average number of the enterprise for the whole year.

Implementation Rules for Individual Income Tax

In our previous newsletter, we had already reported on the changes due to the “Amendment on Individual Income Tax Law”: https://cn.ebnerstolz.com/2018/09/china-seventh-amendment-on-iit-law/?en

On 20 October 2018, the Ministry of Finance and the State Administration of Taxation released the Draft “PRC Individual Income Tax Implementation Rules and Draft Measures on Itemized Deductions”, seeking consultation from the public. The consultation program closes on 4 November 2018.

We have summarized several key points regarding to resident and non-resident tax payers as follows:

Foreign individuals

Five-year rule will be retained

The five-year rule will be remained so that foreign employees can avoid paying taxes on worldwide income as a Chinese resident. Although residence will be triggered based on 183 days, a single break in excess of 30 days will continue to create a “tax break” for these purposes.
The eligibility for the exemption on foreign sourced income may need to be validated through a “put-on-record” filing.

Tax-exempt benefits will be retained

Foreign employees can elect to retain the tax-exempt benefits privilege they currently enjoy.
If the foreign employees elect to claim itemized deductions under the new system when they meet the necessary conditions, they cannot enjoy tax exemption on fringe benefits, such as children’s tuition, and housing rental, and simultaneously claim deduction for such expenses under the itemized deduction system.

PRC domicile individuals

Documentation requirements on itemized deductions

Individuals will be required to submit the information relating to itemized deduction claims for first time declaration to their tax withholding agent or tax bureau, and any subsequent changes should also be notified to the employer.
Unclaimed tax deductible expenses incurred in current year cannot be carried over to the following year.

By issuing the public consulting notice regarding to the specific additional deductions on individual income, we can see China is establishing the framework of a comprehensive deduction system and paves the way for further deepened IIT reformation in the future, and will substantially reduce the tax burdens for both foreign employees and Chinese resident employees.

Please see the special deductions breakdown as follows:

Item	Key qualifying conditions		Annual standard fixed amount for deduction (RMB)	Who can claim?
Children’s education	Pre-school	3 years onwards	12,000	50% for each parent / 100% for either parent
	Compulsory education	Primary & middle school
	Intermediate education	High school, Vocational school
	Higher education	Degree, Masters, Doctorate
Further education	Formal education	As per above levels of education	4,800	Individual taxpayers
Further education	Professional education	Technical / professional certificates	3,600	Individual taxpayers
Serious illness medical fees	Medical expenses > RMB 15,000		Actual expense not exceeding 60,000	Individual taxpayers
Mortgage interest	Limited to first property only		12,000	If jointly owned, either husband or wife to claim
Housing rental	Not owning property in place of work	Big cities	14,400	If joint rental, either husband or wife to claim
		Mid-size (population) > 1m	12,000
		Smaller (population) < 1m	9,600
Supporting elderly	60 years or older parents or other obligations by law	Single child	24,000	Split between siblings: maximum claim is 1,000 per month for any person
Supporting elderly	60 years or older parents or other obligations by law	Not Single Child	12,000

China Expands Scope of Withholding Tax Deferral Treatment on Direct Reinvestments From Foreign Investors

On September 29th 2018, China’s Ministry of Finance, State Administration of Taxation and National Development and Reform Commission and Ministry of Commerce jointly issued Cai Shui [2018] No. 102 (Circular 102) to widen the scope of withholding tax deferral treatment on direct foreign investment encouraged projects to all non-prohibited foreign investments.

Circular [2018]102 replaces Circular [2017]88 and becomes retroactively effective on 1 January 2018.

Prior to the issuance of Circular 102, Circular 88 indicates that the withholding tax deferral policy only applied to foreign investors who directly reinvested their attributable profits from their Chinese tax resident investees into one of the designated encouraged industries.

Under Circular 102, the scope of the withholding tax deferral treatment on direct reinvestment is expanded to all foreign investments that are not prohibited for foreign investors.

An overseas investor qualifies to temporary waive the withholding income tax of the direct investment shall satisfy all the following criteria:

The reinvestment profits shall include equity investment activities.
The attributable profits of an overseas investor should arising from retained earnings.
Cash investment-relevant monies shall be transferred directly and shall not be circulated among other domestic or overseas accounts prior to making direct investments; Non-cash investment-relevant asset ownership shall be transferred directly and shall not be held on behalf, or temporarily held, by other enterprises or individuals prior to making direct investments.

In addition, if overseas investor is entitled to temporary waiver for withholding of income tax pursuant to the provisions but does not claim the entitlement, it may apply to claim the said entitlement within three years from the date of actual payment of the relevant taxes, and request for the refund of the paid tax.

It can be predicted that this policy will greatly promote overseas investors make profit reinvestment in China.

China: Seventh Amendment on Individual Income Tax Law

On 31 August 2018, the seventh amendment on Individual Income Tax Law of China (the “Seventh Amendment”) is officially approved and announced. The last amendment on PRC Individual Income Tax Law was made in 2011 (referred as “Old IIT Law (2011)”). The major topics in the Amendment are summarized as follows.

1. Tax Resident Individual
In the Seventh Amendment, the term for being tax resident in China is changed from staying one year to 183 days or longer within a tax year in China (see details in below chart).

Category	Old IIT Law (2011)	New IIT Law (2018)
Tax Resident	Any individual who has a domicile Note1 within the territory of China or;	Any individual who has a domicile Note1 within the territory of China or;
Tax Resident	Who has no domicile but has stayed in the territory of China for one year or longer.	Who has no domicile but has stayed in the territory of China for 183 days or longer cumulatively within a tax year.
Non-tax Resident	Any individual who has no domicile and does not stay within the territory of China or;	Any individual who has no domicile and does not stay within the territory of China or;
Non-tax Resident	Who has no domicile but has stayed within the territory of China for less than one year.	Who has no domicile but has stayed within the territory of China for less than 183 days cumulatively within a tax year.

Note1: The “individuals domiciled in within the territory of China” mentioned above means individuals who by reason of their permanent registered address, family or economic interests, habitually reside in China.

Tax residents are subject to Chinese IIT on income derived from China and overseas (worldwide income). Non-tax residents are subject to Chinese IIT only on income derived from China. However, as the Chinese IIT regime not only has the IIT law but also a series of administrative regulations that provide more specific guidance on the taxation, the actual impact on the expats due to the amendment of IIT law might be different for each individual.

2. Applicable Individual Income Tax Rate
Under new IIT Law, four types of incomes, including salaries and wages, remuneration for personal services, authors’ remuneration and royalties), are combined as one new tax category called “comprehensive income” (referred as “Comprehensive Income”), which is subject to progressive tax rates ranging from 3% to 45%, with seven tax brackets.

In old IIT Law (2011), these four types of income are subject to different tax rate and brackets. For easy understanding, we summarized the old and new regulations in below charts.

Old IIT Law (2011)		New IIT Law (2018)
Category	Tax Rate	Category	Tax Rate
Wages and Salaries	3% – 45% (7 brackets progressive tax rates)	Comprehensive Income	▶ 3% – 45% (7 brackets progressive tax rates) ▶ Expanding the tax brackets of lower tax rates (i.e. 3%, 10% and 20%), ▶ Reduce and unchanged tax brackets of higher tax rates (i.e. 25%, 30%, 35%, and 45%)
Remuneration for personal services	20 % – 40% (3 brackets of progressive tax rates)
Authors’ remuneration	20%
Royalties	20%

Grade	Old IIT Law (2011)		New IIT Law (2018)
Grade	Annual (monthly) taxable income (RMB)	IIT Rate	Annual (monthly) taxable income (RMB)	IIT Rate
1	No more than 18,000 (1,500)	3%	No more than 36,000 (3,000)	3%
2	18,000 – 54,000 (1,500 – 4,500)	10%	36,000 – 144,000 (3,000-12,000)	10%
3	54,000 – 108,000 (4,500 -9,000)	20%	144,000 – 300,000 (12,000 – 25,000)	20%
4	108,000 – 420,000 (9,000 – 35,000)	25%	300,000 – 420,000 (25,000 – 35,000)	25%
5	420,000 – 660,000 (35,000 – 55,000)	30%	420,000 – 660,000 (35,000 – 55,000)	30%
6	660,000 – 960,000 (55,000 – 80,000)	35%	660,000 – 960,000 (55,000 – 80,000)	35%
7	More than 960,000 (80,000)	45%	More than 960,000 (80,000)	45%

3. Basic Deductions and Special Additional Deductions
Under new IIT Law, the basic deduction for Comprehensive Income is RMB 5,000 per month (old regulation for Chinese individual: RMB 3,500 for salaries; old regulation for foreigner: RMB 4,800 for salaries). The additional basic deduction (RMB 1,300) for foreigner is abolished.

Furthermore, the Seventh Amendment introduces the principle of special additional deduction. According to the Seventh Amendment, the special additional deductions include the expenditures on children education, continuing education, critical medical treatment, housing loan interest, housing rent and support for the elderly etc. However, the detailed scope, conditions and implementation steps are to be determined and announced by PRC State Council.

4. Schedule of Implementation
According to the Seventh Amendment, the new IIT Law will be enforced in two steps:
Step 1 – The new IIT tax rates and new standard basic deduction (RMB 5,000) will be implemented with effect from 1 October 2018;
Step 2 – The seventh amendment shall be fully implemented with effect from 1 January 2019.

Summary
Although the Seventh Amendment has been officially announced, certain topics still need to be clarified. For example, whether the current “five-year-rule” for foreign expatriates will be abolished; whether foreign expatriates can still enjoy tax-exempted benefits on reimbursement basis; the detailed scope and conditions for special additional deduction are to be determined.

VAT Refund for Export Business in China

In the Chinese value added tax (VAT) regime, it is generally not planned that the tax authorities refund any input VAT credit to tax payers, if the balance of input VAT exceeds the output VAT in a fiscal period.

Exceptions to this rule are made, if the input VAT credit is related to the cost of exported goods. In this case, the tax payer can apply for the so-called VAT refund. It refers to the refund of input VAT and consumption tax paid by the exporting entity in the course of purchasing or manufacturing the exported goods.

This political tool to boost the China economy also promotes foreign invested operations in China. It is a potential benefit for a Trading WFOE/JV or Manufacturing Company. The VAT refund can improve the cash flow of an exporting enterprise by realizing VAT credits. The purpose is to enhance competitiveness of Chinese exporting enterprises when entering the international market.

In order to qualify for the VAT refund, exporters must initially register with the tax authorities, providing their business license and export approval documentation to the competent authorities and providing evidence that they have implemented a robust accounting system, which allows to track the portion of their cost related the exported goods. Usually, the tax authority will also conduct an onsite inspection of the applying enterprise. Once the registration is completed, applications for VAT refund can be submitted at any time, but no later than 1 year from the date of the export customs declaration of the respective shipments. The applicant must provide evidence for the production and procurement cost. Since this can be quite complex for manufacturing enterprises, many companies – foreign and domestic invested–establish a separate trading company for the export, which can purchase the export goods from the affiliated production company as well as other third-party manufacturers. For combined trading/manufacturing enterprises there are limitations to receive the export VAT refund: e. g. refund may only be possible for traded goods which are similar to the self-manufactured goods. We recommend to carefully review the business model and inquire with the local authorities in advance.

We emphasize that the VAT refund is not an additional revenue but only the realisation of an existing input VAT credit. While the domestic VAT rate for the sale of goods is 16%, the percentage of the VAT refund can be lower and ranges from 0% to 16%, depending on the HS code of the exported goods, as declared to customs authorities upon export. This means that in many cases, only part of the input VAT can be refunded. After completion of the refund procedure, the non-refundable portion can no longer be set off against domestic output VAT but must recognised as additional cost of goods. The declaration of the specific HS codes for the exported goods should be handled with care to ensure that the HS code matches the actual specifications of the goods. If there are different matching options, the enterprise should ensure that the most beneficial option in terms of VAT refund is chosen.

If you have any questions regarding the input VAT and VAT refund procedures, please feel free to contact us.

New Options for Shareholder Loans

Loans provided by an overseas shareholder to its subsidiary (or joint venture) in China belong to the category of cross-border capital account transactions. Such transactions are generally subject to approval by SAFE (State Administration of Foreign Exchange). The maximum amount of overseas borrowing is limited by specific regulations. After the “Macro-prudential Management of Full-covered Cross-border Financing” (“Circular No. 9”) were issued in May 2017, there are currently two different options, when registering a cross border borrowing agreement:

1. Old method – can still be chosen during a transition period after the implementation of Circular No. 9. Currently it is not known, how long the transition period will last.

Within 15 working days after signing the loan agreement, the borrower in China has to submit the loan agreement and other application documents to SAFE for the approval and registration of the shareholder loan.

The maximum amount of all shareholder loans ever obtained is limited by the gap between the total investment amount (as stated in the Articles of Association) and the registered capital (as per business license). It is required that the registered capital has been paid in in accordance with the schedule in the Articles of Association. SAFE may require an audited capital verification report for the application procedure. If a shareholder loan with term longer than one year is (partially) repaid, such repayment will not increase the limit available for new loans. Repayment of short-term shareholder loans (term not exceeding one year) will however free up the respective amount in the limit.

Example:
ABC China is a 100% subsidiary of ABC Germany, with a total investment of 1 Mio EUR and a registered capital of 700 TEUR, which has been completely paid in. The maximum amount of a shareholder loan is therefore 300 TRMB. If ABC China borrows 200 TEUR for 3 years with repayment of 100 TEUR after 2 years and 100 TEUR after 3 years, the total amount of further shareholder loans possible under the “Old method” will be 100 TEUR (300 TEUR – 200 TEUR).

2. New method, based on (“Circular No. 9”), available since May 2017.

After signing the loan agreement and at least 3 days before the disbursement of the loan, the borrower in China has to submit the loan agreement and other application documents to SAFE for registration of the shareholder loan.

Under the new method, the maximum outstanding of all shareholder loans is calculated from the applicant’s equity (based on the latest audited financial statements), the currency and the term of the loans according to the following scheme:

Max cross border borrowing (in multiples of net equity)	Term of the loan
	up to 1 year		> 1 year
	RMB	foreign currency	RMB	foreign currency
Max cross border borrowing (in multiples of net equity)	1.33	1	2	1.33

Existing loans taken out before the application according to the old or the new method will be deducted from the available limit. After switching to the new method, it is not possible to switch back to the old method later.

Example:
ABC China has a net equity of 850 TRMB per audited financial statements of 31-Dec-2017. The maximum amount for shareholder loans in EUR with term > 1 year would be the equivalent of 1.33 * 850 = 1,133 TRMB = 151 TEUR (at exchange rate 7.5). ABC China has already received a 5-year loan in EUR from its shareholder ABC Germany, the remaining outstanding amount of this loan is 80 TEUR. Therefore, the upper limit for additional borrowing of EUR with term > 1 year would be 151 – 80 =71 TEUR

It should be noted that the approval procedures and criteria applied by the regional SAFE bureaus may differ from the principles outlined above. Before making any decision with regard to shareholder loans, we recommend to contact the SAFE bureau in charge in advance.

New CIT regulations on increase of maximum deductible employee education fee

Caishui [2018] No. 51

On 7 May 2018, the Ministry of Finance and SAT issued a regulation to increase the maximum deductible employee education fee from 2.5% to 8% of total salaries. The exceeding part could be transferred to next years for deduction. The new cap of yearly deduction rate is applied from the year 2018 and onwards.

New CIT regulations on fixed assets depreciation

Caishui [2018] No. 54

The Ministry of Finance and SAT jointly issued a regulation on 7 May stipulating that equipment and tools that are purchased during the period 2008-2020 could be recognized one-off as cost of sales in the current period and fully deductible for CIT purpose on the condition that the unit price is below 5 million CNY. No depreciation is required. For equipment and tools over 5 million CNY, depreciation shall still be done with reference to related tax regulations.

Equipment and tools refer to the fixed assets other than buildings and construction structure.

Im Fokus der deutschen Finanzverwaltung

Guest Article by Sten Günsel (Ebner Stolz)

Eine Vielzahl von Deutschen sind erfolgreich im Ausland tätig – als leitende Angestellte oder Spezialisten international operierender Firmen, als Selbständige bzw. Unternehmer. Sie leben und arbeiten in China bzw. Hong Kong. Sind Sie im Fokus der deutschen Finanzverwaltung?
Darauf lässt sich auf dem Papier keine individuelle Antwort geben, jedoch sind klare Trends und Praktiken des deutschen Fiskus ersichtlich. Diese sprechen eine klare Sprache – auch Deutsche im Ausland sollten die deutschen Steuervorschriften kennen und ernst nehmen.
In der schier ausufernden Fülle und Komplexität des deutschen Steuerrechts lassen sich vier Bereiche benennen, die Sie als mögliche Betroffene kennen sollten:

1. Das deutsche Steuerrecht unterscheidet zwischen der unbeschränkten und der beschränkten Steuerpflicht. Idealerweise sind Sie nur noch beschränkt steuerpflichtig, da damit die Nachweispflicht über die Besteuerung Ihrer weltweit erzielten Einkünfte in Deutschland entfällt. Sind Sie dagegen unbeschränkt steuerpflichtig, prüft der deutsche Fiskus nicht nur, ob Sie im Ausland Steuern zahlen, sondern auch wie viel. Dazu wird die Bemessungsgrundlage unter die Lupe genommen – oft mit dem Ergebnis, dass Teile des nach deutschem Steuerrecht ermittelten Einkommens nicht im Ausland besteuert werden. In diesem Fall besteuert Deutschland nach und zwar in Übereinstimmung mit dem Doppelbesteuerungsabkommen.

Woran knüpft die unbeschränkte Steuerpflicht? Maßgebend ist der Wohnsitz -dieser ist im Steuerrecht definiert und hat mit dem Wohnsitz im melderechtlichen Sinne wenig zu tun. Sie können abgemeldet und dank einer in Deutschland vorgehaltenen Wohnung dennoch steuerpflichtig sein.

2. Zahlungen deutscher Firmen ins Ausland werden untersucht. Dabei lassen sich zwei Fallgruppen bilden. Zum einen geht es um Zahlungen an Mitarbeiter – hier wird geprüft, ob diese für einen deutschen Arbeitgeber arbeiten. Wenn ja, sind alle deutschen Arbeitstage in Deutschland steuerpflichtig, soweit ein Doppelbesteuerungsabkommen gilt (China). Fehlt dieses – Hong Kong – dann sind alle Einkünfte und nicht nur die für den Tag der betrieblichen Weihnachtsfeier in Deutschland zu versteuern. Zum anderen geht es um Zahlungen an Mitarbeiter verbundener Unternehmen wie Dritte. Hier wird geprüft, wem das Konto gehört, auf das die Zahlung geht. In Zweifelsfällen ergehen Mitteilungen ins Ausland und es wird dem Zahlenden der Betriebsausgabenabzug verwehrt.

3. Geschäftsführer und Unternehmer sind aber auch durch das deutsche Außensteuergesetz betroffen. Es gab hier in der Sache keine Rechtsänderung – es wird lediglich die sog. Hinzurechnungsbesteuerung von den Finanzämtern auch tatsächlich durchgeführt. Betroffen sind Inhaber und Muttergesellschaften von Auslandsgesellschaften, die weniger als 25% Steuern im Ausland zahlen. Wird beispielsweise die Vertriebs- bzw. Dienstleistungsgesellschaft im Ausland von einem Deutschen geführt, so wird dies als Fall der Mitwirkung im Sinne des Außensteuergesetzes interpretiert und führt zu Steuernachzahlungen in Deutschland.

4. Schenkungen und Erbfälle werden unter die Lupe genommen – Steuern in Deutschland können anfallen, wenn eine der Parteien in Deutschland ansässig ist – Anknüpfungspunkt ist auch hier der steuerliche Wohnsitz – bzw. das Vermögen in Deutschland ist. Das Doppelbesteuerungsabkommen Deutschland – Volksrepublik China entfaltet keine Wirkung.

Diese Aufzählung ist (leider) nicht abschließend, sondern nur eine Aufnahme aktueller Fälle.

Die deutschen Finanzämter haben sich gerüstet – es ist Fachpersonal vorhanden. Jeder Fall mit Auslandsberührung ist dem internen Spezialisten für Internationales Steuerrecht vorzulegen. Dieser kennt die Materie und stellt Ihnen Fragen zu Ihren persönlichen Verhältnissen. Sind Sie gerüstet, die passenden Antworten zu geben?

Unified standard for small-scale VAT payers

According to circular Caishui [2018] No. 33, issued by the Ministry of Finance on April 4, 2018, the following new rules will apply effective May 1, 2018

The threshold to become ordinary VAT payer will be unified to annual revenue of 5 million CNY.
Companies already registered as ordinary taxpayers with annual revenue below this threshold can become small-scale taxpayers. The application of transfer-back to small-scale taxpayer could be filed before 31 December 2018.

Adjustment of VAT rates as of May 1, 2018

According to circular Caishui [2018] No. 32, issued by the Ministry of Finance on April 4, 2018, the following new rules will apply effective May 1, 2018:

For the manufacturing and trading industry and other sectors that are subject to 17%, the VAT rate will be lowered to 16%.
For transportation, construction and basic telecommunication services and other sectors that are subject to 11%, the VAT rate will be lowered to 10%.
The deduction rate for purchased agricultural products is lowered from 11% to 10%. If the agricultural products are purchased for production, sale or consignment process of the goods that are subject to 16% VAT, the deduction rate will be 12%.
For products and services, for which the export VAT refund rate was 17% in the past, the export VAT refund rate will be adjusted to 16%.
For products and services, for which the export VAT refund rate was 11% in the past, the export VAT refund rate will be adjusted to 10%.
For exported services and products purchased by the exporter before May 1, 2018, the VAT refund rates valid before the Adjustment will still be applied until July 31, 2018.

New Value-added Tax Regulation implements since 1 July 2017

The State Administration of Taxation issued series of new tax announcements which come into force since 1 July 2017. We highlight the key new regulations in the article hereinafter.

1. Taxpayer identification number for ordinary VAT invoice

Pursuant to Announcement of the State Administration of Taxation [2017] No.16, from 1 July 2017, when an enterprise purchaser requests an ordinary VAT invoice (in Chinese: 增值税普通发票), it shall provide the seller with its taxpayer identification number (in Chinese: 纳税人识别号) or unified social credit code (in Chinese: 统一社会信用代码).

The ordinary VAT invoices without taxpayer identification number or unified social credit code cannot be used as tax evidence. This means that expense/cost with such unqualified ordinary VAT invoices cannot be deducted before the enterprise income tax filing. We strongly recommend arrange training to the relevant staff to obtain proper tax invoices in accordance with this new regulations.

2. Deduction time limit for input VAT extended to 360 days

In China, the general value-added taxpayers may apply for input VAT credit upon verifying the VAT invoices obtained from the sellers. Pursuant to Announcement of the State Administration of Taxation [2017] No. 11, special VAT invoices (in Chinese: 增值税专用发票), uniform invoices for the sale of motor vehicles (in Chinese: 机动车销售统一发票) and special customs payment certificates for import VAT, issued on and after 1 July 2017, shall be verified within 360 days as of the date of invoicing.

For the value-added tax deduction vouchers mentioned above which are issued on or before 30 June 2017, the deduction time limit shall remain as 180 days according to old regulations (Guo Shui Han [2009] No. 617).

Individual income tax (“IIT”) regulation on commercial health insurance promoted nationwide

The State Administration of Taxation, Ministry of Finance, China Insurance Regulatory Commission jointly announced the Cai Shui [2017] No. 39 (Circular 39) to promote the pilot polices for individual income tax on commercial health insurance nationwide effective from 1 July 2017. The expenses for purchasing qualified commercial health insurance products by individuals are deductible from the IIT taxable income up to CNY 2400 per year (CNY 200 per month). If the enterprise employers purchase qualified commercial health insurance products for their employees, such expenses shall be included in the salaries of employees and be subject to the above deduction limit as if the commercial health insurance products are purchased by the employees. Qualifying commercial health insurance products refer to health insurance products offering personal income tax incentives and meeting to certain requirements.

You may check with the commercial health insurance supplier to see whether the purchased products are qualified to apply tax deduction or seek for qualified commercial health insurance products.

Comprehensive Implementation of VAT in All Industries

On March 2016, the Standing Committee of the State Council announced detailed policies on comprehensive VAT reform in Cai Shui [2016] No. 36 <Circular on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax> (“Circular 36”).

Starting from 1 May 2016, four service industries, construction, real estate, finance and consumer services, will be subject to VAT rather than Business Tax. This means VAT reforms will be implemented across all industries and the ending of dual tax system with Business Tax. After 66 years’ implement, the Business Tax officially stepped down from the stage of history of China. Let’s have an overview of the milestones of this pilot program of VAT in lieu of Business Tax in below chart.

VAT

According to Circular 36, VAT tax rates for services are 0%, 6%, 11% and 17% and the levy collection rate is 3% as listed in below:

No.	Description	Tax Rate
1	Transportation, Postal, Basic Telecommunication, Construction, Lease of real estate, Sales of Real Estate, Transferring Land Use Right Services.	11%
2	Lease of movable tangible assets Service.	17%
3	Cross-border Taxable Services provided by Domestic entity or individual.	0%
4	Other services. ( including but not limited to Consulting, Finance and Value-added Telecommunications Services)	6%

This pilot program is aim to upgrade the industrial structure and improve the VAT chain. More companies may choose to outsource services and as a result the service industry will be promoted by this new VAT policy.

Taxation of Commercial Health Insurances

China launches pilot Individual Income Tax policy for commercial health insurance

The Ministry of Finance (MOF), State Administration of Taxation (SAT) and China Insurance Regulatory Commission (CIRC) have released Circular 126 which outlines the pilot Individual Income Tax (IIT) policy for commercial health insurance products.

Until 2015, commercial health insurance expenses did not qualify for individual income tax exemption.

Under the new Circular, the certain qualifying health insurance products in pilot areas can be deducted for IIT purposes. The changes have come into effect from 1 January 2016.

Pilot areas include Beijing, Shanghai, Tianjin and Chongqing as well as 27 designated cities located in 27 provinces. Individuals whose IIT is filed in the pilot areas may be eligible for income tax deductions for certain health insurance premiums, up to certain limits.

It is important to know that only such commercial health insurance products are eligible for preferential IIT treatment that are developed according to the guiding framework outlined in Circular 126 and Circular 118.

The purchase of qualifying health insurance products by individuals in pilot areas can be deducted for IIT purposes up to RMB2,400 (US$400) per year.

For more details, please contact us.

2015 Annual Individual Income Tax Deadline

The deadline of the 2015 individual income tax (“IIT”) filing is coming soon. Particularly such individuals whose annual income in 2015 exceeded RMB120,000 are required to file the annual tax return in the local tax bureau.

Expatriates who used to work in China in 2015 and meet one of the following points shall submit the annual individual income tax filing:

The individual’s annual income in 2015 exceeded RMB120,000 (excluding the expatriates that stay in China for less than one year).
The individual’s wage and salary income is earned from more than one employer in China.
The individual’s income is received from outside of China but the employee worked in China.
Individuals who have taxable income, but do not have a withholding agent (such expatriates use the so called self-declaration system to pay the IIT).
Other situations stipulated by the State Council

To calculate the amount of annual income, following type of income shall be considered:

Income from wages and salaries
Income from production or business operation of individual industrial and commercial households,
Income from contracted or leased operations,
Income from remuneration for personal service,
Income from author’s remuneration,
Income from royalties,
Income from interest, dividends and bonuses,
Income from lease of property,
Income from transfer of property,
Contingent income and other income specified as taxable by the finance department of the State Council.

The deadline for the annual individual income filing is March 31^st 2016. Please contact us for further information.

State Council Decisions cancels Certified Tax Advisor license in China

On 22 July 2014, the PRC State Council issued a decision on cancelling and adjusting a batch of administrative examination and approval items (“Guo Fa [2014] No.27”). According to Guo Fa [2014] No.27, the State Council decided to cancel and delegate 45 administrative examination and approval items, cancel 11 occupational qualification licensing and certification items, and modify 31 items subject to examination and approval before registration at administration for industry and commerce into the ones subject to examination and approval after registration at administration for industry and commerce.

It is noticed that some popular certificates such as the Certified Tax Agent (“CTA”) and Certified Public Valuer (CPV) are among the catalogue of 11 professional qualification licensing and certification items to be cancelled decided by the State Council. According to the meeting memo of State Council reported by Xinhua Website, certain certificates like CTA and CPV will not be certified by the government anymore, but we expect that a new system to replace the old CTA and CPV may be announced and clarified in the nearby future.

Shanghai Free Trade Zone easies overseas financing

On August 22, 2013, the State Council approved the establishment of the Shanghai Free Trade Zone (SFTZ) which was officially launched on September 29, 2013. While the actual new achievements are not clear especially with regard to regultations and policies detailly explaining and defining the advantages for investors.

We frequently update for our visitors news about the SFTZ.

Source: Wikipedia

Foreign Invested Companies in China are still limited in assuming overseas financing. In general, the financing is limited to the gap between the share capital and the total investment. Particularly, loans from the investing company are required to be registered and are limited in amount.

Companies in the Shanghai Free Trade Zone may now borrow from overseas without the prior consent from authorities which was announced by the Shanghai headquarters of the People’s Bank of China on 12 February 2015. Banks and securities brokers have also been allowed to finance overseas.

Further, under the new regulation, companies in the SFTZ are no longer limited to borrowing Chinese yuan only.The scale of the foreign financing has also been extended and may be up to twice the company’s capital under the new control method where the mid-term or long-term funds in particularly RMB funds are encouraged to be used.

New DTA between Switzerland and China effective from 15 December 2014 – Which impact on profits gained in previous years?

The new Chinese – Swiss treaty for the avoidance of double tax now privileges the dividend payments gained by the companies who have a direct shareholding of at least 25% to 5% withholding tax rate instead of the previous 10%. It is not clear whether the new regulation also applies for such profits gained by the company in previous years but distributed on or after 1 January 2015.

According to the Announcement of the State Administration of Taxation on the Entry into Force of the Agreement between the Government of the People’s Republic of China and the Swiss Federal Council for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital and the Protocol, effective by 6 January 2015, the Agreement and the Protocol shall take effect as of November 15, 2014 and apply to the income obtained on or after January 1, 2015.

“Income” according to the DTA as well as this announcement means the income gained by the investor. Therefore, this regulation makes clear that also for previous years profit, the 5% regulation shall apply. FCN interviewed the Shanghai tax bureau and received an oral confirmation of this practice for Shanghai.

We hint that in China the execution of new laws and regulations may take time and certain test cases are required. We recommend consulting with your local tax bureau for the applied practice.