Announcement on Issues Relevant to the Implementation of the Policy of Provisional Deferral of Withholding Income Tax on Direct Investments Made by Foreign Investors Using Distributed Profits

This Announcement has been repealed. The new Announcement can be found here.

(Issued by the State Administration of Taxation on January 2 2018 and effective as of January 1 2017.)

SAT Announcement [2018] No.3

Pursuant to relevant provisions such as the State Council, Circular on Several Measures for Promoting the Growth of Foreign Investment (Guo Fa [2017] No.39) and the Circular on Issues Concerning the Policy of Provisional Deferral of Withholding Income Tax on Direct Investments Made by Foreign Investors Using Distributed Profits (Cai Shui [2017] No.88) issued by the Ministry of Finance and three other ministerial level authorities (the Circular), we hereby notify you on issues relevant to implementation of the policy of provisional deferral of withholding income tax on direct investments made by foreign investors using distributed profits (the Policy) as follows:

1. The business activities specified in Item (4) of Article 2 of the Circular specifically include one or more of the following business activities relating to investment projects in the encouraged category:

(1) the production of products or the provision of services;

(2) research and development activities;

(3) the investment in, and construction of, projects or the purchase of machinery and equipment; and

(4) other business activities.

Before recovering its investment benefiting from the Policy or when filing and paying back tax in accordance with Article 7 of the Circular, a foreign investor shall provide documentation such as transaction evidence satisfying Item (4) of Article 2 of the Circular, financial accounting data, etc. to the competent tax authority of the profit distributing enterprise.  If the competent tax authority has any doubts regarding the relevant documentation, it may ask the prefectural (city) tax authority to handle the same in accordance with Article 6 of the Circular.

2. Where back tax is paid in accordance with Article 4 or 7 of the Circular, the foreign investor may be eligible for the treatment available under a tax agreement in accordance with relevant provisions, but may only apply a tax agreement in effect at the time of payment of the relevant profit.  If otherwise provided in a subsequent tax agreement, matters shall be handled in accordance with such subsequent agreement.

3. When a foreign investor is eligible for the Policy in accordance with Article 3 of the Circular, it shall complete a Form for the Report on Information Pertaining to the Deferred Payment of Withholding Income Tax of Non-tax-resident Enterprises and submit the same to the profit distributing enterprise.

When a foreign investor retroactively applies to benefit from the Policy as provided for in Article 5 of the Circular, it shall provide to the competent tax authority of the profit distributing enterprise a Form for the Report on Information Pertaining to the Deferred Payment of Withholding Income Tax of Non-tax-resident Enterprises and the relevant contracts, payment receipts, documentation relating to the activities of the investment project in the encouraged category and other documentation the submission of which is required by the provisions of the provincial tax authority.

When a foreign investor pays back tax in accordance with Article 4 or 7 of the Circular, it shall complete a Form of the People's Republic of China for the Report of the Withholding of Enterprise Income Tax and submit the same to the competent tax authority of the profit distributing enterprise.

4. A profit distributing enterprise shall review, pursuant to Article 3 of the Circular, the documentation and information submitted by a foreign investor and implement the Policy after confirming the following results:

(1) the information provided by the foreign investor is complete and without omissions;

(2) the actual process of paying the profit is consistent with the information provided by the foreign investor; and

(3) the information concerning the profit distributing enterprise in the information provided by the foreign investor is true and accurate.

5. A profit distributing enterprise that is implementing the Policy in accordance with Article 3 of the Circular shall submit the following documentation to the competent tax authority within seven days from the date on which the profit was actually paid:

(1) a Form of the People's Republic of China for the Report of the Withholding of Enterprise Income Tax completed by it; and

(2) a Form for the Report on Information Pertaining to the Deferred Payment of Withholding Income Tax of Non-tax-resident Enterprises submitted by the foreign investor and on which the missing information has been provided by the profit distributing enterprise.

Within 10 working days after receipt of the Form for the Report on Information Pertaining to the Deferred Payment of Withholding Income Tax of Non-tax-resident Enterprises, the competent tax authority of the profit distributing enterprise shall send a Communication Letter on Tax Matters of a Non-tax-resident Enterprise, forwarding relevant information, to the competent tax authority of the investee enterprise as specified in Item (1) of Article 2 of the Circular (the Investee Enterprise), or other relevant tax authority.

6. If the competent tax authority of the Investee Enterprise, or other relevant tax authority, discovers either of the circumstances specified below, it shall report the same to the competent tax authority of the profit distributing enterprise by means of a Communication Letter on Tax Matters of a Non-tax-resident Enterprise within five working days:

(1) facts or information to the effect that the Investee Enterprise does not satisfy the conditions for eligibility for the Policy; or

(2) facts or information to the effect that the foreign investor has disposed of the investment that was benefiting from the Policy.

7. In the course of tax administration, the competent tax authority may, in accordance with the law, require a foreign investor, the profit distributing enterprise, Investee Enterprise, equity transferor or other such relevant entity or individual to provide documentation and information on the eligibility of the foreign investor for the Policy within a specified period of time.

8. If a profit distributing enterprise fails to review and confirm the documentation and information submitted by the foreign investor in accordance with Article 4 hereof, resulting in a foreign investor that is ineligible for the Policy actually benefiting from the Policy, the competent tax authority of the profit distributing enterprise shall pursue in accordance with relevant provisions the liability of the profit distributing enterprise for failure to withhold withholdable taxes and recover the payable taxes from the foreign investor in accordance with the law.

9. If a foreign investor provides information that is erroneous, resulting in its actually benefiting from the Policy where it ought not to have so benefited, the competent tax authority of the profit distributing enterprise shall handle the same in accordance with Article 4 of the Circular.

10. If a foreign investor's investment in a tax-resident enterprise in China includes both an investment in respect of which it is benefiting from the Policy and an investment in respect of which it has not benefited from the Policy and it partially disposes of such investment, it shall be deemed to first be disposing of the investment in respect of which it is benefiting from the Policy.

If a foreign investor fails to retroactively pay the deferred tax in accordance with Article 7 of the Circular, the competent tax authority of the profit distributing enterprise shall pursue its liability for late payment of taxes, which payment delay shall count from the eighth day after actual receipt of the relevant amount.

11. A foreign investor or profit distributing enterprise may engage an agent to handle relevant matters specified herein, provided that it furnishes to the tax authority written proof of such engagement.

12. This Announcement shall be effective as of January 1 2017.

Attachment:

Form for the Report on Information Pertaining to the Deferred Payment of Withholding Income Tax of Non-tax-resident Enterprises