Page 10 - The South China Business Journal
P. 10
South China Business Journal
CHINA BRIEFING China’s Tax According to this DTA, profits realized in China can only be
Residency taxed in China, except if the company situated in China has a
Certificate: permanent establishment (PE) in ABC Ltd.’s home country. If
Implications that were the case, the DTA states that the profits attributable to
for DTA the PE should only be taxed in ABC Ltd.’s home country. Other-
Benefits wise, when income is taxed in China, it should be exempt from
tax in ABC Ltd.’s home country or a tax credit should be granted,
This article was first published on China Briefing. hence effectively eliminating the double taxation.
When transacting with China, a foreign company’s Graphic©Asia Briefing Ltd.
ability to benefit from Double Tax Agreements (DTAs)
often depends on the cooperation and competency of the Chi- In this scenario, assuming that XYZ LLC does not have a PE in
nese party to effectively complete Certificate of Tax Residency ABC Ltd.’s home country, China should be the only contracting
(CTR) application procedures. state able to tax the transaction. That means that ABC Ltd.’s
home country should either (i) not withhold any sum; or (ii)
Although the application process for obtaining a CTR is relative- grant a tax credit.
ly straightforward, delays and setbacks are not uncommon. The
application process is localized, yet it has cross-border implica- In practice, when a WHT is withdrawn, the taxpayer is often able
tions that overseas investors should consider. to benefit from the exemption through a reimbursement if cer-
tain conditions are met. In order for ABC Ltd. to claim the tax
Using a concrete case study, this article demonstrates the impor- credit (or exemption), it is required to prove to local tax authori-
tance of filing timely CTR applications in China and sheds light ties that relevant taxes have been paid in the other contracting
on the application process itself. state (China), hence the need to obtain a CTR from XYC LLC.
Case study Obtaining the CTR
ABC Ltd. based outside of China receives consulting services The State Administration of Taxation Circular 2016 No. 40 ex-
from XYZ LLC based in China. According to the terms of the pressly states that a company can apply for a CTR to enjoy the
commercial agreement signed between the two parties, company benefits of a DTA, and explains the different steps of the process.
XYZ LLC provides services in return for payment from ABC Ltd.
The application to obtain the CTR must be filed by the Chinese
This cross-border transaction leads to a double taxation situ- company or in its name. The application should be made direct-
ation: a Withholding Tax (WHT) is levied in ABC Ltd.’s home ly to the ‘State tax bureau and local tax bureau of county level
country on the fee leaving the country, and Corporate Income which govern [its] income tax for issuance’.
Tax (CIT) has to be paid in China on the revenue generated there
from the transaction. The local tax bureau will generally request the following sup-
porting documents (non-exhaustive list):
A DTA has been signed between ABC Ltd.’s home country and • Application form (multiple copies);
China in order to avoid such double taxation situations. • Photocopy of tax registration certificates;
• Tax receipts of CIT paid in a year (or a formal clarification if no
CIT paid during the year); and,
8
CHINA BRIEFING China’s Tax According to this DTA, profits realized in China can only be
Residency taxed in China, except if the company situated in China has a
Certificate: permanent establishment (PE) in ABC Ltd.’s home country. If
Implications that were the case, the DTA states that the profits attributable to
for DTA the PE should only be taxed in ABC Ltd.’s home country. Other-
Benefits wise, when income is taxed in China, it should be exempt from
tax in ABC Ltd.’s home country or a tax credit should be granted,
This article was first published on China Briefing. hence effectively eliminating the double taxation.
When transacting with China, a foreign company’s Graphic©Asia Briefing Ltd.
ability to benefit from Double Tax Agreements (DTAs)
often depends on the cooperation and competency of the Chi- In this scenario, assuming that XYZ LLC does not have a PE in
nese party to effectively complete Certificate of Tax Residency ABC Ltd.’s home country, China should be the only contracting
(CTR) application procedures. state able to tax the transaction. That means that ABC Ltd.’s
home country should either (i) not withhold any sum; or (ii)
Although the application process for obtaining a CTR is relative- grant a tax credit.
ly straightforward, delays and setbacks are not uncommon. The
application process is localized, yet it has cross-border implica- In practice, when a WHT is withdrawn, the taxpayer is often able
tions that overseas investors should consider. to benefit from the exemption through a reimbursement if cer-
tain conditions are met. In order for ABC Ltd. to claim the tax
Using a concrete case study, this article demonstrates the impor- credit (or exemption), it is required to prove to local tax authori-
tance of filing timely CTR applications in China and sheds light ties that relevant taxes have been paid in the other contracting
on the application process itself. state (China), hence the need to obtain a CTR from XYC LLC.
Case study Obtaining the CTR
ABC Ltd. based outside of China receives consulting services The State Administration of Taxation Circular 2016 No. 40 ex-
from XYZ LLC based in China. According to the terms of the pressly states that a company can apply for a CTR to enjoy the
commercial agreement signed between the two parties, company benefits of a DTA, and explains the different steps of the process.
XYZ LLC provides services in return for payment from ABC Ltd.
The application to obtain the CTR must be filed by the Chinese
This cross-border transaction leads to a double taxation situ- company or in its name. The application should be made direct-
ation: a Withholding Tax (WHT) is levied in ABC Ltd.’s home ly to the ‘State tax bureau and local tax bureau of county level
country on the fee leaving the country, and Corporate Income which govern [its] income tax for issuance’.
Tax (CIT) has to be paid in China on the revenue generated there
from the transaction. The local tax bureau will generally request the following sup-
porting documents (non-exhaustive list):
A DTA has been signed between ABC Ltd.’s home country and • Application form (multiple copies);
China in order to avoid such double taxation situations. • Photocopy of tax registration certificates;
• Tax receipts of CIT paid in a year (or a formal clarification if no
CIT paid during the year); and,
8
