China - VAT excluded from withholding on cross-border royalties, rents 

With the guidance provided by Announcement 9 [2013] (issued 19 February 2013), the corporate income tax burden for non-resident enterprises may be effectively reduced.

Announcement 9

The types of income affected by Announcement 9 are those passive income items defined in paragraph 3 of Article 3 of China’s corporate income tax law, to the extent that the items are subject to VAT under the VAT reform pilot program. Such income items mainly consist of royalties and rents.

With the VAT reform pilot program (replacing the business tax), local tax authorities did not consistently determine that VAT would be excluded from the tax base in determining the amount of corporate income tax withholding.

Announcement 9 confirms that VAT may be excluded from the computation of corporate income tax withholding.

Background

A cross-border royalty payment from China to a non-resident enterprise is subject to corporate income tax withholding at a 10% statutory rate (subject to tax treaty relief when relevant). The basis for calculating the corporate income tax withholding is “total income”—defined by implementing rules as “total consideration and extra charges paid to a non-resident enterprise.” Whether indirect taxes are included in the tax base for calculating the corporate income tax withholding, thus, depends on whether the indirect taxes are considered to be part of the “total consideration and extra charges.” Before the VAT reform pilot program, business tax was the primary indirect tax applied to royalties, and a deduction for business tax was allowed in calculating the corporate income tax withholding.

Read a March 2013 report [PDF 320 KB] prepared by the KPMG member firm in China: VAT to be excluded from calculation of income withholding tax on cross-border royalties and rents