Today’s globalised economy enables companies to provide services across the world. Cross-border business to business (B2B) often takes place via email or other digital communications, such as Skype, WeChat or other messaging and talk platforms. What’s more, monetary transactions are equally carried out primarily using online banking.
All in all, B2B moves fast in the digital world. And with this, taxation on cross-border transactions is no longer exclusive to multi-national entities, but touches every business across borders, large and small. Therefore, understanding how withholding tax works and the applicable rates are crucial not only for tax compliance in relevant jurisdictions but also to the net income of each business.
In China, non- resident companies are subject to withholding taxes on:
- Income generated by non-resident enterprises which have not established companies in China; or
- Income generated by institutions established in China by non-resident enterprises without actual connection with such institutions.
Specifically, where an overseas company generates income within the territory of China, such income is deemed as taxable and be withheld in China. This includes:
- Income from sales of goods;
- Income from provisions of services;
- Income from transfer of property;
- Income from equity investment such as dividends and bonuses;
- Interest income;
- Rental income;
- Income from royalties;
- Income from donations; and
- Other income.
A Chinese entity involved in the transaction of the above forms of income is the withholding agent and is required to withhold and submit the requisite payment to tax authorities. Any entity failing to withhold and submit payment shall be ordered by the tax authority to comply with such payment and may incur liabilities.
Generally, the withholding tax (WHT) rate on enterprise income is 10%. However, if the jurisdiction of the overseas entity and China have signed a Double Tax Treaty (DTA) with a different rate, any rate below the standard 10% shall be applied, and the 10% shall be adopted for any rate above 10%. Additionally, rates may differ for dividends, royalties and interest income.
In practical terms, Chinese entities, as the withholding agent, shall deduct the 10% WHT from the total amount of the service fee and issue a notice to the overseas entity of the amount withheld and paid in China. This notice, in accordance with DTA signed between the jurisdiction of the overseas entity and China, may serve as a credit against the tax payable on such income. The amount of credit, however, shall not exceed the amount of the Chinese tax computed with respect to the taxable income in accordance with the tax laws and regulations of China.
If a British company provides services to Chinese entity in China for a total amount of RMB 1,000, the Chinese entity withholds 10% of the RMB 1,000 as ‘enterprise income’ for the British company. The Chinese entity pays, in total, RMB 900 and a notice of RMB 100 is withheld and paid to the Chinese tax authorities.
The United Kingdom and China have signed a DTA, which allows the Chinese tax of 100 RMB withheld by a Chinese entity to be used as a credit against the tax payable in the United Kingdom on the income generated in China (RMB 1,000).
Therefore, the British entity is not subject to double taxation, the levying of tax by two or more jurisdictions on the same declared income, asset, or financial transaction.
Overall, companies involved in B2B international transactions should be familiar with the DTAs of the countries they do business in. Understanding applicable WHT rates and DTA provisions should save costs and safeguard your tax obligations. Without the correct tax compliance in place, companies risk incurring penalties in both their own country and the jurisdictions they do business in.
If you have withholding tax (WHT) concerns, please contact Horizons at email@example.com to schedule a consultation session. From RMB 1,500 per session, Horizons can provide insight, expertise and the right solutions for you.
Horizons Corporate Advisory helps clients solve complex problems, thrive and be inherently responsible in their business activities worldwide. The countries we operate in include Belarus, Belgium, China, Colombia, Costa Rica, Cyprus, Ecuador, France, Germany, Hong Kong, Indonesia, Italy, Lichtenstein, Luxemburg, Macau, Malta, Mongolia, Netherlands, Nigeria, Portugal, Russia, Singapore, Spain, Switzerland (French and German-speaking cantons), Turkey, United Kingdom (England and Wales) and the United States of America.