New rules make it easier for overseas firms to do business.
China has made a long-awaited change to the process enabling non-residents to claim tax benefits under Double Taxation Avoidance Treaties (DTATs).
Essentially, it’s now easier for firms in countries that have a DTAT with China to conduct cross-border service transactions without having their business profits taxed in China.
Under ‘Announcement 35’ issued by the Chinese State Administration of Taxation (SAT), non-resident businesses are no longer automatically subject to China’s domestic taxation regulations.
Furthermore, time-consuming applications for approval to receive benefits or exemptions connected with paying withholding tax under a DTAT, aren’t required any more.
This latest set of regulations took effect on 1 January 2020 with the goal of streamlining tax administration and making life easier for non-resident taxpayers.
The old rules
Previously, non-residents with China-sourced income were subject to domestic taxation rules by default, even if their country had a DTAT with China.
The person making cross-border payments to a non-resident – known as the ‘tax-withholding agent’ – was required to automatically hold back any relevant domestic Chinese tax from the payment, and immediately declare and pay the tax to the relevant Chinese tax bureau.
Even where a non-resident’s country and China did have a DTAT that included a tax-withholding exemption or reduction, securing those benefits involved going through a lengthy and complex application and approval process.
Change for the better
Now, when a tax-withholding is due to be declared and paid, non-residents and withholding agents can instead submit a ‘Statement of Entitlement to Tax Treaty Benefits’, which means any exemptions or reductions will immediately apply in line with the relevant DTAT.
Non-residents need to ensure they have documentation as evidence of their DTAT entitlement for the specific transaction and, if asked, submit the relevant documents to the Chinese tax authorities.
If a statement of entitlement isn’t submitted, the transaction becomes subject to withholding tax as per the former practice.
Where a transaction is deemed subject to withholding tax after a cross-border payment has already been made to a non-resident, the tax must be paid in full within the prescribed time period.
Announcement 35 changes undoubtedly simplify DTAT-related matters for non-residents and withholding agents alike.
However, non-residents should still obtain professional advice on how their DTAT impacts on their transactions and the necessary evidential documentation that must be kept on file.
Furthermore, since many regulatory changes take months or longer to become common practice, non-residents receiving payments from China are advised to seek local support to ensure their tax-withholding agents in China correctly follow these new procedures.
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Date: January 2020