Ask an Expert 1: IIT on WFOE Dividends in China
In China, foreign residents can currently enjoy a handful of tax exemptions for IIT. Therefore, companies have many opportunities to adjust and plan salary packages along these benefits. In part 1 and 2 of our IIT Series, we have already provided a broad overview on all the basics companies need to know about the Chinese IIT. However, our consultants at ECOVIS always encounter different cases of clients surrounding IIT in China. In our series “Ask an Expert”, we share tips and tricks on common questions and issues that our expert team encounters while supporting our clients in a bite-sized, concise format. Let’s have a look at today’s scenario.
The legal form of the WFOE is an attractive possibility to enter the Chinese market for many foreign investors. Let’s imagine the following: Mr. X invests in the company Y in China, which is a wholly foreign-owned enterprise (WFOE). He received dividend payments from company Y and now the following question comes up:
Do I, as a foreigner, have to pay IIT on dividends obtained from WFOE investments?
In 2018, the Ministry of Finance and the State Administration of Taxation released a list with preferential IIT policies that remain effective until now. Among them is the in 1994 promulgated “Circular of the Ministry of Finance and the State Administration of Taxation on Issues concerning Individual Income Tax Policies”, which contains a list of IIT exempts – and yes, it also has a section on dividends, which states that
“The incomes gained by individual foreigners from dividends and bonuses of enterprises with foreign investment” are exempted from IIT.
Therefore, according to the current regulations, Mr. X can enjoy tax exemption for his dividends received by company Y.
China provides a handful of advantages for foreign investors through preferential IIT policies. Recently, the PRC also announced an extension of fringe-benefits that expats working at a company in China can enjoy.
Do you have any further questions on IIT that were not covered yet? Don’t hesitate to contact our Ecovis-team that will gladly assist you in any issues related to tax, accounting and legal advice.
