Foreign investors get tax dividend boost
September 12, 2012 | BY
clpstaff &clp articles &A new Announcement has lowered withholding tax in China, but foreign companies still need to comply with strict regulations from the State Administration of Foreign Exchange
The State Administration for Taxation (SAT) released the Announcement on the Recognition of the “Beneficial Owner” in Tax Agreements (关于认定税收协定中“受益所有人”的公告) on June 29 and it came into effect on July 1.
The Announcement reduces the burden for determining beneficial owners. It states that, when it comes to passive income under international tax laws, the dividend should be the main form of passive income compared with other royalties and interest.
Taxing dividends is sometimes a complex issue because it can be difficult to determine the beneficial owners. However, the Announcement employs a safe harbour principle for owners, lowering the burden for foreign investors and the SAT.
“Generally speaking, the Announcement fills in a loophole from Circular 601, which gave discretion to local authorities to determine whether the foreign company is the beneficial owner and did not detail the necessary documentation when applying for the reduced withholding tax rate,” said Lawrence Hu, a tax specialist with MWE China Law Offices, in Shanghai.
Article 2 of the Announcement removes that uncertainty as it clearly details the documentation requirements. It also allows both the authorities and applicants to invoke the lower withholding tax rate of as little as 5%, instead of 10%.
This could save companies a large amount of money and make China a more attractive business location. While the government is set to lose revenue from the lower withholding tax, the increase in foreign investors is expected to make up for the loss.
The preferential rate is dependent upon whether the country of residence of the beneficial owner has double tax agreements with China.
According to Hu, Hong Kong and Singapore's capital markets are likely to benefit from the Announcement the most: “The Announcement is equalising tax treatment and the government is paving the way for companies wishing to go public offshore,” said Hu.
Previously, going public meant companies had to disclose uncertainties in documents, but according to the Announcement, these disclosures are no longer required.
Although the Announcement has generated much excitement, Hu said that offshore companies should remember “that payments have to go through the State Administration of Foreign Exchange (SAFE), which is strict when it comes to reviewing documentation and payments.”
While the SAT has opened up under the Announcement, SAFE also needs to do the same so companies can make payments.
“If foreign companies wish to enjoy the benefits of the Announcement they should revisit their business structure and see if it complies with the requirements and if there is consistency to apply for the benefits,” advised Hu.
By David Tring
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