Corporate Income Tax – Part 1, Non-resident enterprise without a PE

By Richard Hoffmann, ECOVIS Beijing China

When it comes to Corporate Income Tax, you should pay attention because, on one hand, there are benefits you don’t want to miss, but on the other hand, there are losses and penalties you don’t want to risk. As a foreign business that has income from China, you may be subject to taxes from both your home country and in China. This could substantially increase your tax burden.

First of all we are going to start with two different cases depending if you are a resident enterprise or non-resident enterprise.

Non-resident enterprises are established under foreign laws, but have either a Permanent Establishment or place of business within the PRC or gain income from sources in China.

To get the right taxation, we need to distinguish between the companies that have a Permanent Establishment and those that do not.  For example, PRC sourced and foreign sourced income is taxable for a foreign company with an effectively connected Permanent Establishment in China both, but only PRC sourced income is taxable for foreign companies with no permanent establishment or one without an effective connection. Here, we might need further explanation regarding the term “effectively connected”.

In general, foreign sourced income is not taxable. However, if the foreign source income is effectively connected with the Permanent Establishment then it will be taxable. “Effectively connected” refers to the company owning equity interest or debt claim giving rise to income or if it owns, manages and controls properties giving rise to income.

Non-permanent establishment

For a company without a permanent establishment within the PRC, only the PRC sourced income is subjected to withholding tax.

Passive Income such as dividend, interest, rental income, royalty, capital gain and other income is subjected to a tax rate of 10%, but the domestic rate may be reduced. For example, if a recipient of interest is a resident of Hong Kong, the income tax rate is reduced to 7%.

Tax base is the total turnover that the foreign enterprise generates in China for the relevant project. No expenses related to the services are to be deducted in this case. The Chinese customer is obliged to withhold the tax for the European company and to transfer it to the appropriate State tax authority.

You can get more information in one of our following articles.

with contribution of Brigitte Both (ECOVIS Beijing)

Richard Hoffmann is a Partner at ECOVIS Beijing China. Richard obtained an honor’s degree in law and worked in Germany, America and China for various prestigious law firms prior to joining ECOVIS. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV. Contact: richard.hoffmann@ecovis.com Ecovis Beijing is the trusted tax and legal advisor of several embassies and official institutions in China. It specializes in mid-sized international companies and focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our Newsletter or give us a call  +86 10-65616609 (ext 811/806)   or contact us directly via Beijing@ecovis.com