Important Update for Asia FIEs: China SAT Clarifies EIT Payment Issues for Non-resident Enterprises

China’s State Administration of Taxation (SAT) issued the “Announcement on Several Issues Concerning the Administration of Non-resident Enterprise Income Tax (EIT) (SAT Announcement [2011] No.24)” on March 28, 2011, clarifying non-resident enterprises’ tax liabilities on their China-derived incomes from security fees, financial leasing, property rentals, equity investments as well as equity transfers. The Announcement took effect on April 1, 2011, and applies to all outstanding tax liabilities incurred before this date.

According to Announcement No.24, where a domestic company and a non-resident enterprise enter into a contract that involves income such as interest, rental, royalty payments, and the former fails to make the payment prior to the date stipulated in the two parties’ contract (or the payment date is extended), but such payment has already been reported as the costs for the enterprise and a pre-tax deduction made in the annual CIT declaration, the related EIT should be withheld and paid in the tax year of the declaration.

The announcement also emphasizes that, if the overdue payment, instead of being reported in one lump sum as costs and fees, is reported as the original price of assets or corporate organization fees, which is then amortized as costs after the asset is put into use or the commencement of production, and deducted pre-tax in multiple years, the related EITs on the total payment should be withheld and paid in the tax year when the asset price is reported.

If the payment by a domestic company is made before the due date, EIT should be withheld on the actual payment date in accordance with the relevant stipulations relating to the withholding of CIT.

Security fees obtained by non-resident enterprises within China are taxable at the interest income tax rate prescribed in the EIT Law. Security fees obtained by non-resident enterprises within China refers to security fees paid or incurred by domestic enterprises, organizations or individuals in accepting security provided by non-resident enterprises in activities such as loan borrowing, sales, transportation of goods, processing, rental, and construction contracting.

Where a non-resident enterprise that has not established organizations and venues domestically transfers its domestic land use rights, or where a non-resident enterprise established an organization or venue, but the income received from the transfer of the land-use right has no actual connections with such organization and venue, EIT shall be calculated and withheld on the balance of the total income derived from the land-use right transfer after deducting the tax calculation base.

When a non-resident enterprise that has not established an organization or venue domestically leases equipment or objects to domestic enterprises in the form of financial leasing, where the lessee acquires the ownership to the equipment and objects upon the expiration of the lease and the non-resident enterprise charges rental according to contract stipulations, the EIT should be calculated based on the balance of the rental fee after deduction of the price of the equipment and objects and withheld and paid by the domestic enterprise.

With regard to the leasing of domestic properties by a non-resident enterprise, for those enterprises that have not established organizations and venues domestically to undertake routine management of the properties, CIT will be levied on the entire rental income received by the non-resident enterprise, which should be withheld and paid by the domestic lessee upon on each payment date or due date. For non-resident enterprises that have entrusted domestic entities or individuals to conduct routine management on the property, non-resident enterprises should self-declare and pay CIT within the legal time limit.

Taxes on non-resident enterprises’ equity investment income (such as dividends and bonus) distributed by resident enterprises should be withheld and paid on the date when the decision on profit distribution is made. However, if the actual payment takes place prior to the profit distribution decision, the EIT should be withheld on the actual payment date.

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