Tax Practice: Applying for Tax Benefits under International Tax Treaties in China

In an effort to facilitate non-resident enterprises in applying for tax benefits, China’s tax bureau recently released the SAT Announcement [2015] No.60, which replaced the previous “Administrative Measures on Tax Treatment under Double Taxation Agreement to Non-resident Enterprises (Guoshuifa [2009] No.124)” and simplified the application procedures for a non-resident enterprise to enjoy tax benefits under the tax treaties signed between China and foreign countries. The new measures came into force in November last year.

When a foreign business or individual derives income from China, the income may be subject to tax in both the business/individual’s home country and China, which could substantially increase their relevant tax burden. Many investors therefore choose to set up an offshore share company in locations that have double taxation avoidance agreements (DTAs) in place with China in order to enjoy reduced tax rates. However, the process of applying for DTA benefits was extremely complicated and tedious.

Here, we highlight five major changes that have been introduced, as well as provide a list of countries that have signed DTAs with China.

Applicable Scope

The new Announcement extended the applicable scope of the DTAs to include other international transport treaties signed between China and foreign countries, specifically:

• International Transportation Treaties
• Air Transport Agreement
• Sea Transport Agreement
• International Road Transport Agreement
• Tax Treaties for International Transport Income

Administrative Approval

The new regulations canceled the pre-approval for non-resident taxpayers when claiming tax benefits for dividends, interest, royalties and capital gains. This means that taxpayers may determine whether they are qualified for the tax benefits by themselves and enjoy the preferential tax rates under the tax bureau’s afterwards supervision and management. The taxpayers may either choose to claim the benefits on their own or finish the application procedures with a tax withholding agent.

Submission of Application Materials

The measures also simplified the documents required for applying for tax treaty benefits, clarifying that non-resident taxpayers may submit any additional documents which can prove their eligibility for the tax benefits. However, applicants are still required to submit the following documents to the tax bureau when applying for the incentives:

• Report on Tax Resident Identity of Non-resident Taxpayer
• Report on Entitlement of Non-resident Taxpayer to Tax Treaty Benefits
• Identity certificate (e.g., a copy of the passport) of the non-resident taxpayers
• Proof of ownership such as payment receipt, contracts, agreements with regard to the taxable income, resolution of the Board of Directors or Shareholders’ Meeting, etc.
• Other documents as stipulated by relevant tax regulations

Please note that a Chinese translation will be required where the submitted documents are in foreign languages.

Obligation

The obligation of the non-resident taxpayers, the tax withholding agent and the tax bureau is further clarified in the new rules. Taxpayers must apply for the tax treaty benefits retrospectively and are liable for the authenticity and legality of the documents and reports they submit.

Supervision and Administration

Following the abolishment of the pre-approval system, the tax bureau will strengthen the supervision of non-resident taxpayers after they enjoy the tax benefits.

Investors may check the table below and determine whether they are a tax resident of a country that has an effective DTA agreement with China.