CHINA Law and Practice Contributed by: Mei Zhang, DaHui Lawyers
assets received gratuitously from other enterprises, organisations or individuals are thus subject to a tax rate of 25% for resident enterprises. Non-resi - dent enterprises may be subject to withholding tax. This income is recognised on the date of actual receipt. • Subsidies, penalties and exchange gains: Although the OECD Model Convention does not list these types of income separately, the implementation rules of the PRC CIT Law specifically include them under “other income”: (a) If enterprises receive fiscal funds from the government at the county level or above, the government subsidy can be treated as non- taxable income. If these conditions are not met, they are considered taxable income. (b) The CIT treatment of liquidated damages is executed two ways. From the perspective of the recipient, the total amount procured from liquidated damages should be included in tax - able income and is subject to CIT. From the perspective of the payer, liquidated damages can be deducted before tax if the payer obtains genuine, legal and relevant pre-tax deduction vouchers. (c) Exchange gains should be considered taxable income upon accrual (regardless of whether they are realised), and conversely, exchange losses are deductible when incurred (regardless of whether they are realised). 4. OECD/G20 Global Tax Reform 4.1 Pillar One – Amount B China has not yet issued domestic laws or regulations regarding Amount B, nor has it incorporated the for - mulaic pricing method for Amount B into its domestic transfer pricing (“TP”) administration system. 4.2 Pillar One – Amount A As a beneficiary and staunch defender of globalisa - tion, China adopts a supportive and co-operative atti - tude towards Amount A of Pillar One. On the one hand, China firmly believes that the growth of the global economy depends on economic glo - balisation and digitalisation. As such, China strongly
advocates for international tax policies conducive to development and recognises that the best way to address tax issues stemming from economic digi - talisation is through multilateral negotiations. Thus, China opposes unilateral measures that could trigger trade wars and has consistently acted as a mediat - ing force, with the intention to promote open dialogue and prevent conflict with other nations. On the other hand, over years of international tax practice, China has championed the Market Contribution theory. This underscores the market’s crucial role in the cross- border profit distribution of multinational enterprises (MNEs). To protect the market jurisdictions’ sovereign taxing rights, China promotes equitable tax yields. From this perspective, China’s leading international tax philosophy is consistent with the intentions set out in Pillar One. Overall, only a few Chinese companies meet both the EUR20 billion revenue threshold and the 10% profit - ability ratio set out in the agreement. Those that do are mainly concentrated in sectors such as oil, bank - ing and insurance, all of which fall under exclusions of the agreement. However, certain companies (pri - marily internet enterprises) may be affected to some extent. For example, according to the 2023 European Union Tax Observatory report on Pillar One, China now represents 19.1% of Amount A-covered groups and 17.3% of total Amount A profits, accounting for approximately EUR15.8 billion in taxable profits. Even though China occupies 13 spots out of 68 covered MNEs, ranking second in the world, many Chinese companies still remain unaffected by Amount A. 4.3 Pillar Two China has not yet implemented the global minimum tax stipulated in Pillar Two, nor has it specified a spe - cific implementation date. 4.4 Specific Features or Deviations of Pillar Two China has not yet implemented the global minimum tax. 4.5 Digital Services Tax China eschews a special tax category for digital prod - ucts in favour of adapting the current fiscal framework to the unique characteristics of the digital economy.
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