CHINA Law and Practice Contributed by: Mei Zhang, DaHui Lawyers
3. Taxation of Cross-Border Income 3.1 Income From Immovable Property In China, income from immovable property (such as real estate and land) is levied according to the tax - payer’s status (resident/non-resident) and type (indi - vidual/enterprise). IIT on Rental Income For China-domiciled individuals Rental income from real estate rentals within or out - side China must be declared and taxed in China and is subject to policies stipulated in the “property rental income” category. Rental includes but is not limited to profits from the leasing of buildings, granting of rights to land usage, machinery and equipment, motor vehicles, ships, and other properties. • Tax rate: The statutory tax rate is 20%. • Calculation of taxable income: (a) for each income ≤RMB4,000, taxable income = income – RMB800 (fixed expenses); and (b) for each income exceeding RMB4,000, taxable income = income amount × (1 – 20%). For non China-domiciled individuals Only rental income from China-based rentals is tax - able. A statutory rate tax of 20% applies to each pay - ment and is withheld by the payer. CIT on Rental Income For TREs Income generated from a property (regardless of whether it is from domestic or foreign sources) must be included in the total amount of annual taxable income and taxed at a standard rate of 25% (preferen - tial tax rates may be applied to qualified enterprises). For non-TREs Tax procedures depend on the enterprise’s PE status in China and whether the rental income is effectively tied to its operations. • Scenario 1 (unrelated income): Rental income is considered income sourced from within China and subject to a 10% withholding tax rate if the enterprise does not qualify as a PE or if the rental income is not attributable to the PE. The tax will be
withheld and remitted by the payer at the time of payment. • Scenario 2 (related income): Rental income attrib - utable to the PE must be included in the establish - ment’s profits and taxed at a rate of 25%. 3.2 Business Profits TREs are subject to CIT on their worldwide income, which includes all operating profits derived from both within and outside China. This income is consolidated and taxed at the standard CIT rate of 25% unless the enterprise qualifies for and applies specific preferen - tial tax policies. The CIT liability on operating profit of a non-TRE depends on whether it has a PE in China and whether its China-sourced income is effectively connected to that PE: • Income effectively connected to a PE – Profits attributable to a PE in China constitute the taxable income of that PE. This income is taxed on its net profit (after allowable deductions) at the standard CIT rate of 25%. • Income not effectively connected to a PE – If a non-TRE has no PE in China, or if specific China- sourced income is not effectively connected to an existing PE, such income is generally subject to withholding tax at a rate of 10% on the gross amount. The tax is generally withheld and remitted by the payer. 3.3 Passive Income In China, the taxation of passive income differs for res - ident and non-resident taxpayers. The passive income of resident taxpayers is normally included in their cur - rent/yearly taxable income, while the passive income of non-resident taxpayers is typically subject to with - holding tax at source, where the payer is responsible for filing and remitting the relevant tax. Under Chinese tax law, withholding tax is a mandatory legal obligation. According to the PRC CIT Law, non- TREs receiving China-sourced income in the form of dividends, interest and royalties, are usually subject to a 10% withholding tax rate. The payer must withhold and remit this tax on behalf of the enterprise upon each payment. Although legal withholding agents often
112 CHAMBERS.COM
Powered by FlippingBook