Not only can tax treaties effectively eliminate double taxation, they can provide more preferential tax treatment than domestic law. Today, I would like to share with you some of the tax treaty benefits that enterprises can enjoy, please follow me and have a look!
What is a tax treaty?
A tax treaty is an agreement signed by two countries or regions with tax jurisdiction to avoid double taxation and prevent tax evasion. Tax treaties mainly involve corporate income tax and individual income tax.
China has brought 103 tax treaties and agreements into effect by December 31 2019. Tax treaties can help cross border enterprises enjoy preferential treatment of tax reduction or exemption and settle cross border tax disputes, that’s why they are called “talismans” for enterprises engaging in cross border operations.
What tax treaty benefits can enterprises enjoy?
Whether a resident enterprise obtains income from abroad or a non-resident enterprise obtains income from China, as long as it meets the conditions stipulated in tax treaties, it can enjoy corresponding preferential treatment. The common ones are as follows:
Tax exemption for business profit
When an enterprise engages in contracting projects or providing labor services abroad, if its activities continue less than a period stipulated by the tax treaty (usually continuous or cumulative over 6 months or 183 days in any 12 months), it will not constitute a permanent establishment, so that its business profit can be exempted from foreign income tax.
Tax reduction on dividends, interest and royalties
The tax rate of dividends, interest, and royalties stipulated in the tax treaty is generally lower than that in domestic law. In this case, the host country should levy tax at a rate no higher than that stipulated in tax treaty. Taking Russia as an example, Russia's domestic withholding income tax rate of interest is 20% normally, while according to the agreement between China and Russia, the withholding income tax rate of interest is 0.
Tax exemption for capital gains
When an enterprise receives gains from the alienation of overseas capital (including shares, immovable property, etc.), the balance after the deduction of the net asset value from the total income shall be the taxable income. Under the terms of tax treaty, the enterprise which meets requirements can enjoy tax exemption for capital gains abroad .
Tax Sparing Credit
According to the tax treaty, when resident enterprises enjoy tax exemption or reduction granted for overseas income in accordance with the tax law of the host country, the amount of such exemption or reduction can be credited in the resident country as the actual income tax paid by the enterprise.
What is and how to start cross-border tax dispute resolution?
When an enterprise has a tax dispute with the local tax authority abroad or encounters unfair tax treatment, it may apply to the tax authority of its home country to initiate a mutual agreement procedure so that the tax authority shall negotiate with its foreign counterpart to help solve the problem. For the specific content and procedures of China's mutual agreement procedure, please refer to the No. 56 announcement of 2013 and No. 6 announcement of 2017 issued by the State Taxation Administration of China.
What procedures are required for enterprises to enjoy the tax treaty benefits?
Chinese resident enterprises can apply to the county-level tax authorities to issue a “Certificate of Chinese Fiscal Resident" and apply for tax treaty benefits in accordance with the requirements of the host country (region). For the materials and procedures required to issue this certificate, please refer to the No. 40 announcement of 2016 and No. 17 announcement of 2019 issued by the State Taxation Administration of China.
If non-resident enterprises intend to enjoy the tax treaty benefits, firstly they shall fill in the “Information Reporting Form for Non-resident Taxpayers Claiming Treaty Benefits" and submit it to the withholding agent; secondly, they shall keep relevant materials for their own for reference, mainly including Certificate of Fiscal Resident issued by the home country tax authority and relevant contracts and agreements and other ownership proof. For specific requirements, please refer to No. 35 announcement of 2019 issued by the State Taxation Administration of China.
In the context of China's open economy, making good use of international tax rules and tax policies of the host country will help multinational enterprises safeguard their own rights and reduce tax costs. If you encounter international tax problems, you can turn to the contact person of taian Municipal Tax Service ,tel:05386138670.