By Khoonming Ho of KPMG
Circular 30, recently issued by China’s state administration of taxation (SAT), is a very positive development for foreign investors in China, bringing tax relief on dividends for many foreign investors.
The new rules don’t reduce the domestic Chinese withholding tax rate on dividends for foreign investors, which remains 10 per cent. But, foreign investors that hail from countries covered by relevant tax treaties, the new regulations have made it easier to obtain tax treaty benefits and bring down the withholding tax rate on dividends to as little as 5 per cent.
The new rules do two things. Firstly, they introduces safe harbour rules for foreign investors that are listed on stock exchanges in the relevant treaty locations. Secondly, they give some flexibility in establishing who is eligible for tax treaty benefits.
China has already entered into tax treaties with over 90 countries or territories. More than 40 treaties offer reduced withholding tax rates on dividends derived from China including Singapore and Hong Kong.
Typically such tax treaty would state that if the foreign investor holds at least certain per cent of equity in a Chinese subsidiary, for example 25 per cent, it can enjoy a reduced withholding tax rate for dividends of say 5 per cent, in contrast to the normal 10 per cent. This is a significant reduction.
However, to get that, the foreign investor has to prove that it is the true owner of the dividends, i.e. it does not receive the dividends on behalf of someone else. This rule is to prevent the abuse of tax benefits by means of conduit companies. In other words, the foreign investor will be put through the beneficial ownership test. This is not peculiar to China. Many countries have similar requirements.
In China, the beneficial ownership rules are contained in Circular 601, a 2009 document, that requires investors to submit a considerable amount of information and is very legalistic.
For example, the rules did not make allowances for special purpose companies set up to hold shares in other companies for genuine legal, commercial or operating reasons, e.g. listing vehicles.
Foreign investors expressed concerns to the Chinese tax authorities. After thorough consultation with representatives from corporations and advisors, SAT has issued Circular 30 to address these concerns.
Under Circular 30, a foreign investor that is listed on a stock exchange in a relevant treaty location can now automatically be recognised as the beneficial owner of the dividends. The new circular also enables a foreign investor to designate another entity as the beneficial owner of the dividends if it holds the shares of the Chinese company as an agent.
It forms part of broader efforts by the Chinese tax authorities to increase clarity, certainty and predictability in enforcement of tax regulations and treaties. The move is also timely, as many companies are currently planning to distribute dividends out of China. They can take full advantage of the new relaxation in the rules.
Khoonming Ho, is partner-in-charge, tax, at KPMG China and Hong Kong
Guest post: China’s quiet radical moves , Linda Yueh, beyondbrics
China eases taxes for foreign companies, FT
Reforming China’s capital account, FT editorial
China to let in more foreign investment, FT
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China should open up markets to investors, Inside Business, FT
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