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Six Q&A On Overseas Income Tax Policies For Tax-Resident Enterprise

Release time: Sep 26, 2018

If you are ready to “go global” to start your business, this Q&A list is a must-read to help you better understand overseas income tax policies for tax-resident enterprises.

Q: Is it true that whether the income tax paid outside China is entitled to tax credit depends on if the country from which the income is derived has signed a tax treaty with the People’s Republic of China?

A: No. Credit for foreign-sourced income tax is not limited to countries that have signed double tax treaty with China. Income tax paid by enterprises in foreign countries that have not entered the double tax treaty with China is also entitled to the income tax credit policy according to Chinese laws and regulations. However, the tax sparing clause can be adopted only when clearlyidentified in the tax treaty.

Q: How to identify whether overseas income tax is deductible when the name of tax category overseas is different from that in our country?

A: Taxes paid under the following circumstances can be seen as deductible foreign-sourced income tax:

(1) Income deriving from foreign countries and the amount of tax calculated in accordance with Enterprise Income Tax Law and regulations in the foreign country.

(2) Since the name for enterprise income tax varies in different countries, such as corporate income tax or profits tax, specific name of tax is irrelevant as long as the nature of tax belongs to Enterprise Income Tax, which is levied on the net income of the enterprise.

(3) The tax credit policy aims at avoiding double taxation levied to the same enterprise by two countries. The policy can only be adopted to tax payable and paid for the income sourced outside the territory of China (tax sparing clause or other specific circumstances excluded). In the case that the deductible income tax is not identified in the tax treaty or the income is derived from a non-treaty country, and cannot be identified as enterprise income tax, it should be reported to the State Administration of Taxation for approval.

Q: Are all income taxes paid by the companies in foreign countries entitled to tax credits in China?

A: Income taxes paid in the following circumstances are not entitled to tax credit in China:

(1) Taxes that are mis-levied or mis-paid according to income tax laws or regulations overseas.

(2) Foreign-sourced income tax that should not be levied according to tax treaty.

(3) Interest or overdue payment or penalty paid due to insufficient or late tax payment in foreign countries.

(4) Tax that is refunded or compensated to tax payer or its interested party by foreign tax authorities.

(5) Foreign-sourced income tax that has already been exempted according to Enterprise Income Tax Laws and implementation regulations.

(6) Foreign-sourced income tax that has been reduced from taxable income according to regulations of the Ministry of Finance and State Administration of Taxation.

Q: Our company established an enterprise in Country A in 2015 and part of its equity was transferred to company B in 2017. A withholding income tax was levied on us by Country B. Is this tax deductible in China and how?

A: Yes the withholding tax paid is deductible in China. Withholding income taxes withheld at source on equity investment income originated from or occurred in foreign countries such as the dividend and bonus, or income from interest, rent, royalties or property transfer are entitled to be deducted. The limit of tax credit should be calculated according to regulations. Amount within the limit of tax credit can be credited directly from tax payable in the current period, while amount exceeding the limit of tax credit will be credited in the subsequent five years using the remaining balance of the yearly tax credit after it has credited the taxes that should be credited that year.

Q: Our company has a project in Country A with a total income of RMB1 million, the tax rate is 15% so we paid an income tax of RMB150,000. We have another project in Country B with an income of RMB 1 million, and the tax rate is 35%, so we paid an income tax of RMB 350,000. How do we calculate the limit of tax credit?

A: The Ministry of Finance and the State Administration of Taxation jointly issued the Notice on Improving Overseas Enterprises’ Income Tax Credit Policy (Cai Shui [2017] No.84), which clearly states that a new comprehensive calculation method will be added to the current country (region)- specific calculation method. The taxpayer may choose to apply the comprehensive credit method to the overseas investment income or the pre-existing calculation. 

If you use the country-specific method and the tax you paid is RMB 150,000, it is not creditable, you should add income tax 1,000,000*25%- 1,000,000*15%=100,000. In Country B, the income tax is RMB 350,000 and the credit limit is RMB 250,000, the tax you paid cannot be fully credited. The final income tax will be RMB 100,000. If you use the comprehensive credit method, your company’s overseas investment income will be RMB 2 million, and the paid income tax of RMB 500,000 will be credited in full. Income tax payable =2,000,000*25%-1,000,000*15%-1,000,000*35%=0.

The Notice grants the taxpayers the right to choose. They can choose the comprehensive credit method or the country-specific method for foreign investment. But once the method is selected, it cannot be changed within five years.

Q: The overseas income obtained by our company is paid in Country A with the country’s currency. How do we convert the of foreign exchange when we apply for tax credits in China?

A: If your company’s standard currency for bookkeeping is RMB, it should be converted according to the RMB exchange rate used when the foreign currency is recorded. If the standard currency for bookkeeping is other currencies, the mid-market exchange rate of the last day of the Chinese tax year shall be adopted.

Policy References:

1. Law of the PRC on Enterprise Income Tax

2. Implementation Regulations of the Law of the PRC on Enterprise Income Tax

3. Notice of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Foreign Income Tax Credit of Enterprises

4. Notice of the State Administration of Taxation on the Publication of the Guidance on Foreign Income Tax Credit of Enterprises (2010, No.1 Notice of the State Administration of Taxation)

5. Notice on the Management Issues Following the Cancellation of the Simplified Taxation Methods and Tax Sparing Clause to Foreign-sourced Income Tax(Notice No.70, 2015, State Administration of Taxation)

6. Notice on Improving Overseas Enterprises’ Income Tax Credit Policy (Cai Shui [2017] No. 84)