Announcement on Several Issues Concerning the Administration of Income Tax on Non-tax-resident Enterprises

(Issued by the State Administration of Taxation on February 28 2011 and effective as of April 1 2011.)

SAT Announcement [2011] No.24

Pursuant to the PRC Enterprise Income Tax Law and its implementing regulations (the Enterprise Income Tax Law), we hereby announce issues relevant to the administration of income tax on non-tax-resident enterprises as follows:

1. Issue of Withholding Enterprise Income Tax on Payable but Unpaid Income

When an enterprise in China (an Enterprise) and a non-tax-resident enterprise execute a contract or agreement relating to interest, rent, royalties or other such income and if the aforementioned income is not paid on the date specified in the contract or agreement or the contract or agreement is amended or revised to postpone the payment, but such income has already been included in the Enterprise's costs or expenses for the period in question and has been deducted before tax on the annual enterprise income tax return, enterprise income tax shall be withheld in accordance with relevant provisions of the Enterprise Income Tax Law at the time of filing the annual enterprise income tax return.

If the income payable but not paid by an Enterprise is not included in the costs or expenses for the period in question as a lump sum payment, but rather is included in the original price of the relevant asset or in the enterprise startup costs and is allocated to costs or expenses by period and deducted before tax from enterprise income tax by tax year after the asset is brought into service or after the commencement of production and operations, enterprise income tax shall be withheld for the entire amount of the aforementioned income at the time the Enterprise files the tax return for the year in which it included the same in the relevant asset.

If an Enterprise pays the aforementioned income before the date of payment specified in the contract or agreement, it shall withhold enterprise income tax at the actual time of payment in accordance with relevant provisions of the Enterprise Income Tax Law.

2. Issue of the Tax Treatment of Charges Paid for the Provision of Security

When a non-tax-resident enterprise receives charges originating in China for the provision of security, it shall calculate and pay enterprise income tax at the tax rate for interest income specified in the Enterprise Income Tax Law. The aforementioned “charges originating in China for the provision of security” means the charges for security or other charges of the same nature paid or borne by an enterprise, organisation or individual in China for security provided for it/him/her by a non-tax-resident enterprise in the course of a borrowing, sale/purchase, carriage of goods, undertaking of processing, lease, project contracting or other such economic activity.

3. Issue of Levy of Tax on Income Derived from the Assignment of Land Use Rights

If a non-tax-resident enterprise without an office or establishment in China assigns land use rights in China or, although it has such an office or establishment, the income it derives from the assignment of land use rights has no actual connection with its office or establishment, it shall calculate and pay enterprise income tax on the balance obtained from subtracting the tax base from the total amount of the revenue derived from the assignment of the land use rights as the income derived from the assignment of the land use rights, and the same shall be withheld by the withholding agent at the time of payment.

4. Issue of the Tax Treatment of Rent Income Derived from Lease Financing or from the Lease of Immovable Property

(1) If a non-tax-resident enterprise without an office or establishment in China leases equipment, things, etc. to an enterprise in China for use on a lease financing basis and, after the expiration of the lease term, ownership of the equipment or things vests in the enterprise in China (including a transfer for consideration to an enterprise in China after expiration of the lease term) and the non-tax-resident enterprise charges rent during the term specified in the contract, it shall calculate and pay enterprise income tax on the balance obtained from subtracting the cost of the equipment or things from the lease charge (including the price for the transfer for consideration to the enterprise in China after the expiration of the lease term) as loan interest income, and the same shall be withheld by the enterprise in China at the time of payment.

(2) If a non-tax-resident enterprise leases out immovable property, such as premises or a building, located in China and does not have an office or establishment established in China to effect day-to-day management thereof, it shall calculate and pay enterprise income tax on the entire amount of the rent income it receives, and the same shall be withheld by the lessee in China each time it makes a payment or when such rent becomes payable.

If a non-tax-resident enterprise appoints someone to effect day-to-day management over the aforementioned immovable property in China or appoints another entity or individual in China to do so, it shall be deemed as having an office or establishment established in China and shall itself file and pay enterprise income tax by the deadlines specified in tax laws.

5. Issue of the Handling of the Withholding of Enterprise Income Tax on Equity Investment Returns Such as Dividends and Bonuses

When a tax-resident enterprise in China distributes dividends, bonuses and other such equity investment returns to a non-tax-resident enterprise that does not have an office or establishment in China, it shall withhold enterprise income tax on the date it makes the decision to distribute profits. If the actual payment day precedes the date of the decision to distribute profits, enterprise income tax shall be withheld at the time of actual payment.

6. Issues Relevant to the Implementation of the Circular on Strengthening the Administration of Enterprise Income Tax on Income Derived from the Transfer of Equity of Non-tax-resident Enterprises (Guo Shui Han [2009] No. 698; the Circular)

(1) If a non-tax-resident enterprise directly transfers equity in a tax-resident enterprise in China and, pursuant to the equity transfer contract or agreement, payment therefor is to be made in instalments, realisation of the revenue shall be recognised at the time the contract or agreement enters into effect and the procedures for the change in equity are completed.

(2) For the purposes of Article 1 of the Circular, the term “shares of Chinese tax-resident enterprises bought and sold on public securities markets” means an act wherein the recipient, quantity and price of the shares bought and sold are not agreed upon in advance by the buyer and seller but rather are determined in accordance with the normal trading rules of the public securities market.

(3) For the purposes of Articles 5, 6 and 8 of the Circular, the term “offshore investor (de facto controller)” means all investors that indirectly transfer equity in a tax-resident enterprise; for the purposes of Article 5, the term “actual tax burden” means the actual tax burden on the income derived from the equity transfer, and the phrase “income tax is not levied” means that enterprise income tax is not levied on the income derived from the equity transfer.

(4) If two or more offshore investors simultaneously indirectly transfer equity in a tax-resident enterprise, one among them may, in accordance with Article 5 of the Circular, submit the information to the competent tax authority of the place where the tax-resident enterprise whose equity is being transferred is located.

(5) If an offshore investor simultaneously indirectly transfers equity in more than one tax-resident enterprise, and such enterprises are located in different provinces (cities), it may elect to provide the information in accordance with Article 5 of the Circular to the competent tax authority of the place where one of the tax-resident enterprises is located, and the tax authority of the province (city) where the competent tax authority is located shall hold consultations with the tax authority(ies) of the other province(s) (city(ies)) to determine whether taxes are to be levied, and report the same to the State Administration of Taxation. If a determination is made to levy taxes, taxes shall be paid to the competent tax authorities of the places where each tax-resident enterprise is located.

7. This Announcement shall be effective as of April 1 2011. Items arising before the implementation of this Announcement, but the tax treatment of which has not been carried out, shall be handled in accordance with this Announcement.