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Tax Connect Flash | China tax regulation update

Clarifications on various tax issues related to non-tax-resident-enterprises

Circular Number: SAT Announcement [2011] No.24 Issuance Date: 2011-3-28 | Effective Date: 2011-4-1

This Regulation covers various income tax issues of a non-tax-resident-enterprise (“non-TRE”):

  • Timing of tax liabilities for amounts due to a non-TRE but not yet been paid;
  • Tax treatments for guarantee fees, gains from transfer of land-use rights, rental income from financial lease or real estates derived by a non-TRE;
  • Time to recognise dividend income derived by a non-TRE.

Clarifications for certain unclear issues in Circular [2009] No.698 (“Circular 698”). Circular 698 was issued in 2009 to strengthen taxation of transfer of equity in China by non-TREs. Specifically, Circular 698 for the first time stipulated that an indirect transfer of equity in a Chinese company (by transferring an offshore company which holds equity in China) may be taxed in China, if the offshore structure lacks business substance. This Regulation now further clarifies certain issues such as the timing for recognizing equity transfer gains under instalment payments, definition of effective controlling party, which tax authority to report to if shares in more than one Chinese companies are indirectly transferred, who shall report if more than one non-TREs indirectly transfers the equity in a Chinese company at the same time, etc. The Regulation also further defines the scenarios under which the off-shore structure shall be disregarded.

Individual Income Tax (“IIT”) Law Amendment

Issuance Date: 2011-4-25

The Draft Amendment is open for public opinions till 2011-5-25. It contains the following major amendments:

  • The standard monthly deduction is raised from RMB 2000 to RMB 3000 (expatriates enjoy an additional monthly deduction of RMB 2800 same as in the past);
  • The progressive tax rate table is modified from 9 layers to 7 layers and the scale of each layer is adjusted;
  • The tax declaration period is extended from 7 days of the following month to 15 days of the following month.

Based on the above, low and medium income tax payers will pay less tax while high income tax payers with a monthly income of above approx. RMB 20000 will have to pay more tax. However, the changes in the tax burden are overall not significant.

The highest IIT rate of 45% is not changed. The overall IIT system remains simple but relatively simple without considering family status or different levels of living costs all over China, etc.

Calculation of IIT for an annual bonus if part of the tax for the annual bonus is borne by the employer

Circular Number: Announcement [2011] No.24 Issuance Date: 2011-4-28 | Effective Date: 2011-5-1

This Regulation clarifies how IIT shall be calculated for an annual bonus if part of such tax is borne by the employer, i.e. net arrangements.

The SAT urges local tax authorities to strengthen IIT collection

Circular Number: Circular Guoshuifa [2011] 50 Issuance Date: 2011-4-15 | Effective date: 2011-4-25

This Circular was issued by the SAT to local tax authorities to urge the latter to strengthen IIT collection. Among other things, emphasis has been made to strengthen the IIT administration on expatriates working for permanent establishments in China. Local tax authorities are encouraged to set up and keep records for expatriates working in China for tax administration purposes.

Taxation of “technical fees” in the context of the Double Taxation Treaties (“DTTs”) concluded by China with India, UK and Pakistan

Circular Number: SAT Announcement 2011 No.19 Issuance Date: 2011-3-16 | Effective date: 2011-1-1

Unlike other DTTs, these three DTTs contain a special “technical fees” clause. This regulation provides general rules on how to determine the source of such “technical fees” and how to determine the actual Chinese income tax liabilities connected with such “technical fees”.

VAT issue for transfer of tangible goods during enterprise restructurings

Circular Number: SAT Announcement 2011 No.13 Issuance Date: 2011-2-18 | Effective date: 2011-3-1

In case the whole or part of a business (including tangible assets as well as creditor's rights, liabilities and employees) is transferred by means of merger, split, sales, swap, etc, the involved transfer of intangible goods shall not be subject to VAT (effective from 1 March 2011).

However, this regulation does not provide any guidance regarding the exact scope and conditions of such VAT treatment. Further, there are still unclear issues to be clarified. E.g. in an asset deal, in the past, it was clear that VAT should be paid for transfer of tangible goods. If, under the new regulation, no VAT would be payable, can the buyer credit the relevant input VAT of the seller?

It is expected that the SAT may issue further circulars to clarify the uncertainties caused by this regulation.

New Double Taxation Treaty

Circular Number: SAT Announcement 2011 No.10 Issuance Date: 2011-1-30 | Effective date: 2011-1-1

DTT with Turkmenistan takes effect from 30 May 2010 and applies to taxes payable in 2011 and afterwards.

Small and low profit enterprises – Corporate Income Tax reduction

Circular Number: Circular Caishui [2011] No.4 Issuance Date: 2011-1-27 | Effective date: 2011-1-1

If the annual taxable income of such enterprise is below RMB 30k, the effective CIT rate shall be 10% for the tax year 2011 compared with the standard rate of 25%.

Business Tax (“BT”) for transfer of residential real estates

Circular Number: Circular Caishui [2011] No.12 Issuance Date: 2011-1-27 | Effective date: 2011-1-27

Aimed to curb down the hot real estate market, this regulation provides different BT treatments for different scenarios as follows:

  • 5% on the full sales price if residential real estates are transferred within 5 years since purchase;
  • 5% on the gains if non-ordinary residential real estates are transferred after 5 years since purchase;
  • No BT if ordinary residential real estates are transferred after 5 years since purchase.