Good news for foreign enterprises in China, it's possible to get withholding tax on dividends in China deferred under certain circumstances.
If you're interested in lowering your company's tax burden, keep reading for the details...
What is withholding tax on dividends in China?
In general the tax authorities charge a 10% withholding tax on income from dividends, interest, property leasing, and royalties that are made in China.
For example, if you are repatriating profits from China as dividends, there will be a 10% tax to pay on that profit. In addition, there may also be tax to pay to your home country on the dividend when it arrives there too.
This is not unusual, many countries charge this kind of tax, but it's also useful to note that if your country has a mutual tax treaty with China then it's possible that you won't be charged this tax by China as well.
How To Defer The Withholding Tax
That being said, the opportunity to lower your company's tax burden, especially on profits, is always welcome.
In order to encourage continual foreign investment into China the authorities have brought in a new WHT deferral scheme on dividends used for foreign investment, but only in specific areas.
Essentially, if you keep money in China, you can be rewarded with the tax deferral.
According to China's Finance Ministry, this move will “promote the growth of foreign investment, improve the quality of foreign investment and encourage overseas investors to continuously expand their investment in China.”
Why might you do this?
Firstly, it's important to recognise that tax in China is not very low. Not only is there a basic 25% CIT, but companies must also pay additional costs such as their employees' social security and housing fund payments. Therefore, this deferral scheme becomes a carrot with which to tempt foreign businesses who are looking to lower their tax burden.
So if your Chinese company, for example a WFOE, has plans to do more diverse types of business in China, then this scheme may suit your plans, as keeping money in China becomes cheaper than repatriating it.
WHT deferrals will be valid on:
- Direct investment - equity investments into Chinese companies, opening new local companies, or share acquisition of Chinese companies (usually not applying to listed companies, unless they are deemed 'strategic investments').
- Conducting business activities in government encouraged industries, including agriculture, textile, mining, chemicals, pharmaceutical, and many more.
- Dividends being transferred to a local business that is being invested in.
Your accountant, or accountancy firm in China, will be able to advise you on your options if you're planning on making investments in China, but this deferral is in action right now, so if you have already paid WHT on investments made in China then you will have 3 years to claim this back from the authorities.
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