China Clarifies Corporate Income Tax Treatment for Non-Resident Enterprises under VAT Reform

Mar. 4 – China’s State Administration of Taxation (SAT) recently promulgated an announcement concerning the corporate income tax (CIT) treatment for non-resident enterprises in the value-added tax (VAT) pilot reform (SAT Announcement [2013] No. 9, hereinafter referred to as the “Announcement”). The Announcement came into effect on February 19, 2013.

The purpose of the Announcement is to clarify the confusion regarding whether the VAT amount should be included in the tax base for withholding tax levied on non-resident enterprises. According to the Announcement, VAT should be excluded from taxable income such as dividends, bonuses, and royalty fees derived by non-resident enterprises.

The Announcement specifically addresses income originated from China and earned by non-resident enterprises with no establishment presence in China, or enterprises with an establishment in the country but obtaining income that has no actual connection with the establishment.

For certain services, such as technology transfers and trademark copyright transfers, the prices paid are considered royalty fees. Prior to the pilot reform, the taxable income was considered as the full amount of the royalty fees including the 5 percent business tax (BT). Under the pilot reform, non-resident enterprises who provide such services to companies in China are now subject to 6 percent VAT. The Announcement makes it clear that, within the pilot areas, the taxable income of the royalty fees should exclude the VAT amount.

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