Withholding Tax on Dividends, Interest, Royalties and Technical Services
The imposition of withholding tax is a fiscal requirement for foreign enterprises conducting business operations in China. This tax is levied on diverse forms of earnings, encompassing dividends, interests, royalties, and technical services all originating within China. In detail, the withholding tax is applied to the different service categories as follow:
Dividends paid to foreign companies are subjected to a 10 per cent withholding tax, which has been reduced from the standard 20 per cent rate, unless a tax treaty specifies a lower rate. Both resident and nonresident individuals typically face a 20 per cent withholding tax on dividends, although nonresident individuals may experience a reduced rate according to a tax treaty. To boost foreign investment in China, the government has introduced regulations allowing the deferral of withholding tax on dividends and reinvested profits directed towards foreign investors. No withholding tax is applied to dividends paid to domestic companies.
Interest paid to foreign companies is subject to a standard 10 per cent withholding tax, lowered from the regular 20 per cent rate, unless specified differently in a tax treaty. Both resident and nonresident individuals face a 20 per cent withholding tax on interest payments (excluding bank deposits and Chinese government bonds), with the possibility of a reduced rate for nonresident individuals under a tax treaty. Additionally, a 6 per cent Value Added Tax (VAT) is generally applicable. Interest payments to domestic companies are not subject to withholding tax.
Royalties paid to foreign companies are subject to a 10 per cent withholding tax, unless a tax treaty specifies otherwise. For royalties paid to resident individuals, a 20 per cent withholding tax is applied, considered as an advanced tax payment. Nonresident individuals face a progressive withholding tax on royalties, ranging from 3 to 45 per cent, unless specified otherwise by a tax treaty. While a 6 per cent VAT is generally applied, it may be waived for royalties related to the transfer of qualified technology. No withholding tax is imposed on royalties paid to domestic companies.
Fees for technical services taxation
Technical service fees paid to foreign companies are subject to the statutory EIT rate (25 per cent) on a net-profit basis, provided the services are carried out within China, unless a tax treaty states otherwise. In cases where documents substantiating costs and expenses are unavailable, a minimum deemed profit rate of 15 per cent is utilized. Fees for technical services paid to resident individuals incur a withholding tax ranging from 20 to 40 per cent, treated as an advanced tax payment. Nonresident individuals face progressive withholding tax rates ranging from 3 to 45 per cent on such fees, unless specified otherwise by a tax treaty. Additionally, a 6 per cent VAT is levied if the service recipient is situated in China. Withholding tax is not applicable to fees for technical services paid to domestic companies.