Post by Nelson on Feb 26, 2009 5:15:13 GMT 4
China: Levying withholding tax on H-share dividends
On November 6 2008, the PRC state administration of taxation (SAT) issued a circular regarding withholding tax by the PRC resident enterprises on distributing H-share dividends to overseas non-resident enterprise shareholders, Guoshuihan [2008] number 897. H-shares refer to shares of PRC companies listed on overseas stock exchanges (primarily Hong Kong). According to this circular, when a PRC resident enterprise pays dividends for the year 2008 and any subsequent year to an overseas H-share non-resident enterprise shareholder, a 10% tax must be withheld on the dividends paid. The dividend recipient can thereafter, either by itself or through an agent or through the PRC resident enterprise distributor, apply to the relevant tax authorities for any tax refunds in accordance with an applicable tax treaty, if any.
This circular finally clarifies the withholding tax treatment of dividends paid by resident enterprises to non-resident enterprises holding overseas H-shares in compliance with the new enterprise income tax law (EIT law). Under the EIT law, non-resident enterprises are subject to withholding tax on China-sourced dividends.
However, certain issues remains unclear: the specific procedures and documentations required in order to apply for tax refunds under a tax treaty. As discussed with the draftsman in SAT, number 897 does not prevent applying a lower withholding tax rate directly; rather, it provides protection to enterprises which cannot provide evidence of tax treaty protection at the time of dividend remittance. It may then apply for the refund when sufficient evidence is submitted later. In addition, the official indicates that B shares shall also follow number 897.
Official related-party transactions annual disclosure forms released
On December 17 2008, the SAT released nine related-party transactions annual disclosure forms, Guoshuifa [2008] number 114. These forms are issued pursuant to article 43 of EIT Law, which also requires contemporaneous documentation to be completed. Yet, the detailed rules regarding contemporaneous documentations are still pending to be finalised by the SAT.
First, the annual disclosure forms must be completed and submitted together with the corporate annual tax filings. Second, the forms shall be submitted by all companies as long as related-party transactions take place. Third, altogether nine forms must be completed by taxpayers, which include: related parties, summary of related-party transactions, sales and purchases, services, transfer of intangible assets, transfer of fixed assets, financing, outbound investment, and outbound payments.
According to article 44 of EIT law, failure to prepare and submit the forms would constitute a basis for the tax authorities to initiate a transfer pricing audit.
Clarification on deduction of R&D expenses for EIT purposes
On December 10 2008, the SAT issued a circular of administrative measures on pre-tax deduction of enterprises' research and development expenses for EIT purposes (provisional), effective as of January 1 2008, Guoshuifa [2008] number 116.
This circular was enacted on the basis of article 30 of the EIT law and article 95 of its implementation rules, which provide, in pertinent part, that if R&D expenses are incurred for the development of new technology, products and techniques which have not been capitalised as intangible assets, an additional 50% deduction can be claimed for EIT purposes; If the expenses have been capitalised as intangible assets, 150% amortisation can be claimed for EIT purposes. In furtherance of those general provisions, the said circular stipulates the qualifying R&D activities for applying the additional deduction and the scope of deductible R&D expenses.
In particular, the following R&D activities fall into the category: activities that are listed in high and new technology areas with key support by the state; activities that are listed in guidance for development of prioritised key areas of high technology industries (2007 edition). Further, the following expenses are allowed for additional deduction: new product designing fees, R&D expenses incurred for the directly consumed materials fuels and energy fees, the wages and salaries of staff engaging in R&D activities, other costs for developing software, patented or non-patented intangible assets and so on.
Implementation plan of customs duties for 2009
The PRC general administration of customs will apply the new implementation plan of customs duties effective as of January 1 2009. Under the 2009 implementation plan, lower import duties will be imposed on certain high-tech equipment, productive raw materials with highly domestic demand. With respect to export duties, some items such as steel will eliminate export duties and some items such as fertilisers and raw materials will apply special export duties. Overall, the entire implementation plan is intended to strengthen the national economic development, in combating the worldwide financial crisis.
Stephen Nelson (stephen.nelson@kingandwood.com.hk), Beijing & Hong Kong
On November 6 2008, the PRC state administration of taxation (SAT) issued a circular regarding withholding tax by the PRC resident enterprises on distributing H-share dividends to overseas non-resident enterprise shareholders, Guoshuihan [2008] number 897. H-shares refer to shares of PRC companies listed on overseas stock exchanges (primarily Hong Kong). According to this circular, when a PRC resident enterprise pays dividends for the year 2008 and any subsequent year to an overseas H-share non-resident enterprise shareholder, a 10% tax must be withheld on the dividends paid. The dividend recipient can thereafter, either by itself or through an agent or through the PRC resident enterprise distributor, apply to the relevant tax authorities for any tax refunds in accordance with an applicable tax treaty, if any.
This circular finally clarifies the withholding tax treatment of dividends paid by resident enterprises to non-resident enterprises holding overseas H-shares in compliance with the new enterprise income tax law (EIT law). Under the EIT law, non-resident enterprises are subject to withholding tax on China-sourced dividends.
However, certain issues remains unclear: the specific procedures and documentations required in order to apply for tax refunds under a tax treaty. As discussed with the draftsman in SAT, number 897 does not prevent applying a lower withholding tax rate directly; rather, it provides protection to enterprises which cannot provide evidence of tax treaty protection at the time of dividend remittance. It may then apply for the refund when sufficient evidence is submitted later. In addition, the official indicates that B shares shall also follow number 897.
Official related-party transactions annual disclosure forms released
On December 17 2008, the SAT released nine related-party transactions annual disclosure forms, Guoshuifa [2008] number 114. These forms are issued pursuant to article 43 of EIT Law, which also requires contemporaneous documentation to be completed. Yet, the detailed rules regarding contemporaneous documentations are still pending to be finalised by the SAT.
First, the annual disclosure forms must be completed and submitted together with the corporate annual tax filings. Second, the forms shall be submitted by all companies as long as related-party transactions take place. Third, altogether nine forms must be completed by taxpayers, which include: related parties, summary of related-party transactions, sales and purchases, services, transfer of intangible assets, transfer of fixed assets, financing, outbound investment, and outbound payments.
According to article 44 of EIT law, failure to prepare and submit the forms would constitute a basis for the tax authorities to initiate a transfer pricing audit.
Clarification on deduction of R&D expenses for EIT purposes
On December 10 2008, the SAT issued a circular of administrative measures on pre-tax deduction of enterprises' research and development expenses for EIT purposes (provisional), effective as of January 1 2008, Guoshuifa [2008] number 116.
This circular was enacted on the basis of article 30 of the EIT law and article 95 of its implementation rules, which provide, in pertinent part, that if R&D expenses are incurred for the development of new technology, products and techniques which have not been capitalised as intangible assets, an additional 50% deduction can be claimed for EIT purposes; If the expenses have been capitalised as intangible assets, 150% amortisation can be claimed for EIT purposes. In furtherance of those general provisions, the said circular stipulates the qualifying R&D activities for applying the additional deduction and the scope of deductible R&D expenses.
In particular, the following R&D activities fall into the category: activities that are listed in high and new technology areas with key support by the state; activities that are listed in guidance for development of prioritised key areas of high technology industries (2007 edition). Further, the following expenses are allowed for additional deduction: new product designing fees, R&D expenses incurred for the directly consumed materials fuels and energy fees, the wages and salaries of staff engaging in R&D activities, other costs for developing software, patented or non-patented intangible assets and so on.
Implementation plan of customs duties for 2009
The PRC general administration of customs will apply the new implementation plan of customs duties effective as of January 1 2009. Under the 2009 implementation plan, lower import duties will be imposed on certain high-tech equipment, productive raw materials with highly domestic demand. With respect to export duties, some items such as steel will eliminate export duties and some items such as fertilisers and raw materials will apply special export duties. Overall, the entire implementation plan is intended to strengthen the national economic development, in combating the worldwide financial crisis.
Stephen Nelson (stephen.nelson@kingandwood.com.hk), Beijing & Hong Kong