Announcement on Issues Concerning the Withholding at Source of Enterprise Income Tax of Non-resident Enterprises

关于非居民企业所得税源泉扣缴有关问题的公告 (中文)

STA Announcement [2017] No.37 — Issued by the State Taxation Administration on October 17, 2017. Effective from December 1, 2017.

Sources:

• Chinese text: 上海市税务局 (Shanghai Tax Service)

All information in this document is authentic in Chinese. English is provided for reference only. In case of any discrepancy, the Chinese version shall prevail.

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In accordance with the Enterprise Income Tax Law of the PRC (hereinafter "EIT Law") and its Implementation Regulations, and the Tax Collection and Administration Law and its Implementation Rules, the following announcement is hereby made on issues concerning the withholding at source of enterprise income tax of non-resident enterprises:

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Point 1 — Scope of Application

This Announcement applies to the handling of withholding at source of non-resident enterprise income tax in accordance with Article 37, Article 39, and Article 40 of the EIT Law. Matters related to Article 38 of the EIT Law do not fall within the scope of this Announcement.

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Point 2 — Withholding Through Third Parties

Where a payer as defined in Article 104 of the Implementation Regulations voluntarily entrusts an agent or designates a third party to make payments on its behalf, or where a third-party guarantor or surety makes payments due to a guarantee contract or legal requirement, the withholding obligation shall remain with the principal, the designating party, or the guaranteed party.

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Point 3 — Equity Transfer Income

Income from transfer of property specified in Article 19, paragraph 2 of the EIT Law includes income from the transfer of equity interests and other equity investment assets (hereinafter "equity"). Taxable income from equity transfer = equity transfer proceeds − net equity value.

Equity transfer proceeds means all consideration received by the transferor, including all income in monetary and non-monetary forms.

Net equity value means the tax basis of the equity — the actual capital contribution paid to the Chinese resident enterprise at investment, or the actual acquisition cost paid to the previous transferor. Where equity has changed in value during the holding period and gains/losses may be recognized per regulations, the net equity value shall be adjusted accordingly. The enterprise may not deduct any amount potentially distributable from undistributed profits or other shareholder retained earnings of the invested enterprise.

Where the same equity acquired through multiple investments is partially transferred, cost shall be calculated on a pro-rata basis from total cost.

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Point 4 — Foreign Currency Conversion

Where payments are made or denominated in a currency other than RMB:

1. Withholding agent withholds — convert at the median RMB exchange rate on the date the withholding obligation arises (the date of actual payment or the due date).
2. Non-resident self-reports before tax authority deadline — convert at the median rate on the day before the date of issuance of the tax payment certificate.
3. Tax authority orders payment — convert at the median rate on the day before the date of the payment order decision.

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Point 5 — Currency Conversion for Property Transfer

Where property transfer proceeds or net property value is denominated in a foreign currency:

1. First, convert amounts to RMB per Point 4;
2. Then, compute taxable income from property transfer per Article 19, paragraph 2 of the EIT Law.

The denomination currency shall be determined based on the currency actually paid or received when the property was acquired or transferred. Where the original currency has ceased circulation and been replaced, conversion shall use the market conversion ratio.

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Point 6 — Gross-Up for Tax-Borne-by-Payer Arrangements

Where the contract stipulates the withholding agent shall bear the applicable tax on income specified in Article 3, paragraph 3 of the EIT Law, the withholding agent shall gross up the non-resident enterprise's net-of-tax income to a tax-inclusive amount to compute and remit tax.

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Point 7 — Filing Deadline and Installment Income

The withholding agent shall declare and remit withheld tax within 7 days from the date the withholding obligation arises.

For dividends, profit distributions, or other equity investment income, the withholding obligation arises on the date such income is actually paid.

Where a non-resident enterprise receives income from the same property transfer through installment payments, installments may first be treated as recovery of property cost. Tax shall be computed and withheld only after the entire cost has been recovered.

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Point 8 — Filing Form and Documents

When declaring and remitting withheld tax, the withholding agent shall submit the PRC Enterprise Income Tax Withholding Report Form (中华人民共和国扣缴企业所得税报告表).

Materials already submitted before the declaration need not be resubmitted.

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Point 9 — Self-Reporting by Non-resident Enterprises

Where the withholding agent has not lawfully withheld tax or cannot fulfill its obligation, the non-resident enterprise shall declare and pay tax to the competent tax authority at the place where the income arises, per Article 39 of the EIT Law.

Where the non-resident enterprise fails to declare, the tax authority may order payment within a specified deadline. If the non-resident enterprise voluntarily pays before the deadline order, it shall be deemed to have paid on time.

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Point 10 — Multiple Income-Arising Locations

Where income arises in multiple locations involving multiple tax authorities, the non-resident enterprise may choose one location for filing. The accepting tax authority shall, within 5 business days, send a Non-resident Enterprise Tax Affairs Liaison Letter to the other relevant tax authorities.

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Point 11 — Record-Keeping

The tax authority may require parties to provide contracts and related materials. The withholding agent shall maintain a withholding ledger and contract file, accurately recording non-resident enterprise income tax withholding.

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Point 12 — Enforcement When Withholding Agent Fails to Withhold

Where tax was not withheld, the tax authority at the withholding agent's location shall order retroactive withholding and pursue liability per the Administrative Penalty Law. Where tax needs to be pursued from the taxpayer, the tax authority at the income-arising location shall enforce collection.

Where these locations differ, the income-arising location authority shall verify through the withholding agent's location authority, which shall send a Liaison Letter within 5 business days.

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Point 13 — Measures for Pursuing Unpaid Tax

When pursuing tax payable, the tax authority may:

1. Order the non-resident enterprise to declare and pay within a specified deadline;
2. Collect information about the non-resident enterprise's other income items in China, and issue a Tax Matters Notice to the payer of such items to pursue overdue tax and late payment surcharges.

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Point 14 — Distinguishing "Withheld but Not Remitted" from "Not Withheld"

Where payments subject to withholding have been actually paid but tax has not been remitted, and any of the following circumstances exist, it shall be treated as "tax withheld but not remitted":

1. The withholding agent clearly notified the payee that tax was withheld;
2. The withheld tax was separately recorded in accounting;
3. The withheld tax was separately deducted in tax filings;
4. Other evidence proves tax was withheld.

All other cases shall be treated as "tax that should have been withheld but was not".

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Point 15 — Tax Treaty Precedence

Where this Announcement is inconsistent with a tax treaty and its related provisions, the tax treaty shall prevail.

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Point 16 — Competent Tax Authorities

The competent tax authority at the withholding agent's location is the withholding agent's income tax authority.

For different income types per Article 7 of the Implementation Regulations:

1. Transfer of immovable property — the tax authority where the immovable property is located;
2. Transfer of equity investment assets — the income tax authority of the invested enterprise;
3. Dividends and equity investment income — the income tax authority of the distributing enterprise;
4. Interest, rental, royalty income — the income tax authority of the entity/individual that bears or pays the income.

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Point 17 — Effective Date and Repealed Provisions

This Announcement takes effect on December 1, 2017. Points 7(2)–(3) and 9(2) may also apply to income arising before the effective date but not yet processed.

The following provisions are repealed:

1. Interim Measures for Withholding at Source of Non-resident Enterprise Income Tax (Guoshuifa [2009] No.3);
2. The relevant statement in Article 2(3) of Guoshuifa [2009] No.32;
3. The relevant statement in Article 4(2)(3) of Guoshuifa [2009] No.85;
4. Notice on Strengthening Administration of EIT on Equity Transfers by Non-resident Enterprises (Guoshuihan [2009] No.698);
5. Article 9 of the Coordinated Administration Measures for Non-resident Enterprise Tax (Guoshuifa [2010] No.119);
6. Article 36 of STA Announcement [2010] No.4;
7. Articles 5 and 6 of STA Announcement [2011] No.24;
8. The relevant statement in Article 2(3) of STA Announcement [2014] No.37;
9. Article 8, paragraph 2 of STA Announcement 2015 No.7.

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Attachment: Non-resident Enterprise Tax Affairs Liaison Letter

State Taxation Administration

October 17, 2017