Applicability of withholding tax
In China, withholding tax is applied to the following China-sourced incomes derived by non-resident enterprises without establishments in China, or to that derived by non-resident enterprises with establishments in China but whose income is not related to these establishments:
- Dividends, bonuses, and other equity investment proceeds;
- Interests, rents, and royalties and income from the transfer of property; and
- Any other incomes subject to corporate income tax obtained by non-resident enterprises.
Withholding tax rates
The withholding tax rate for non-tax resident enterprises in China is 20 percent (currently reduced to 10 percent). For dividends, interests, rents, and royalty income, if the respective rate in a tax treaty is higher than 10 percent, the 10 percent rate will prevail; if the rate in the tax treaty is lower than 10 percent, then the rate in the tax treaty should be adopted. For example, Hong Kong’s double tax agreement with China reduces the withholding tax rate on dividends from 10 percent to five percent where the beneficial owner directly owns more than 25 percent equity of the company that pays the dividends, unless the dividends should be regarded as business profits.
[tips title="Important Tip"]The tax payable on income derived by non-resident enterprises should be withheld at the source, with the payer (i.e., the Chinese enterprise who remits the fund overseas) as the withholding agent.[/tips]
The formula for calculating withholding tax liability:
TAX PAYABLE = TAXABLE INCOME x TAX RATE
Filing procedure for withholding tax
Where a non-resident enterprise derives China-sourced dividends, interest, rents, and royalties, or income from property transfers, it is required to file the withholding tax either by itself or by a withholding agent.
With the SAT’s Announcement on Issues Relating to Withholding Tax on China-Sourced Income of Non-resident Enterprises (SAT Announcement  No.37 (hereinafter Circular 37) coming into force on December 1, 2017, the filing procedure for withholding tax was significantly clarified and revised.
According to Circular 37:
- The record-filing of the contract was no longer required.
- The additional reporting requirement for income paid by instalment was cancelled.
- The arising time of withholding obligation was revised: Circular 37 clarified that the time of withholding obligation arising on equity investment income should be the actual payment date.
- The due date of the payment of withholding tax was relaxed.