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Non-trade outbound remittance can be one of the biggest challenges for foreign companies and non-resident companies operating in mainland China. This article provides an overview of how foreign-invested enterprises should process taxes related to non-trade outbound remittance.
Non-trade outbound remittance refers to foreign exchange payment to foreign enterprises or institutions for their service provision or other income sourced from China, such as profits, interest payments, rental fees, royalty fees, and other income related to the transfer of capital and properties.
As one of the major tax challenges for foreign enterprises and non-resident companies (NRCs) in business transactions with Chinese companies, it is important to set the record straight on the fiscal treatment of related flows in order to avoid issues and a lack of documents or proof required by the local financial authorities.
Withholding refers to the way in which organisations and individuals with tax withholding obligations for the taxpayer act in accordance with China's fiscal policies. The resident taxpayer directly deducts the corresponding fiscal impact from the remittance on behalf of the payee before a transaction is processed at the bank. The purpose of this procedure is to manage and control the local source of income and mitigate tax avoidance practices.
A withholding agent refers to resident companies obliged to proceed with declarations on behalf of their overseas providers who obtain income from China without establishing an office or entity in the region. The aforementioned income is subject to enterprise income tax and VAT according to local tax regulations.
Withholding tax refers to income tax withheld in advance of payment. Withholding tax is not a type of tax, but the global customary name for income tax withheld at source. As prescribed in Chinese tax law and implementation regulations, foreign enterprises that obtain profits (dividends and bonuses), interest, rents, royalties and other income from China are subject to 10% income tax.
Simplified process flow in practice
*requirements may vary subject to different regions and applicable tax authorities.
The following letters represent the computational factors involved:
‘Preferential tax rates’, under double tax treaties as mentioned in the above table, reflect the favourable tax rates that enterprises may be entitled to enjoy. So, what are double tax treaties? Under which circumstances can enterprises enjoy preferential tax rates?
Double tax treaties are also called ‘tax pacts’. They refer to written agreements signed by sovereign states to deal with mutual tax distribution relations.
Double tax treaties limit the right to tax in accordance with domestic tax laws by lowering the tax rate or raising the tax threshold in the country of origin, and providing tax credits for foreign taxable income in the resident country, thus avoiding double taxation by both parties.
Under the premise of following the general policies of the State Administration of Taxation, local tax authorities in China have a certain level of autonomy in the collection and administration of tax treatments, which may result in regional differences in tax practices.
Preferential tax rates that taxpayers can enjoy according to relevant tax policy do not apply automatically. While non-resident taxpayers have the right and obligation to apply for tax preferences and to submit the relevant documents as required by the relevant tax authorities, in practice, many non-resident taxpayers lack knowledge of their application rights or do not have a local representative in China to assist them in this regard.
From the Chinese service recipients’ perspective, they often have no interest or intention in helping their service providers in this process, leading to unnecessary taxes being paid or not being able to enjoy the tax incentives for which they are eligible.
Non-resident taxpayers should actively seek assistance from Chinese tax professionals when dealing with outbound remittance issues, with the goal of maximising the legitimate tax benefits under tax policies.
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