Contributed by: Masson de Morfontaine, Anthony Hung
Starting from 1 January 2020, the procedures to claim benefits (e.g. reduced withholding tax rate, etc.) under Mainland China’s tax treaties will be simplified, which are from filing relevant documents with Chinese tax authority for record upon declaration to retaining relevant documents for follow-up administration by the Chinese tax authority. The salient features of the new procedures are as follows:
Documents for declaration
The non-resident taxpayer (claiming tax treaty benefit) or the Chinese withholding agent is required to submit a simplified Information Reporting Form which will require considerably less information than the existing Form, such as the non-resident taxpayer’s name, contact details, together with a statement by the non-resident taxpayer confirming that:
- The taxpayer is a resident of the other contracting state based on the laws and regulations of that state and under the relevant provision of the applicable tax treaty;
- The principal purpose of the relevant transaction or arrangement is not to obtain treaty benefits;
- Upon self-assessment, the taxpayer believes that it meets the requirements for claiming treaty benefits and takes corresponding legal responsibility; and
- The taxpayer will cooperate with and will retain relevant documentation for review by the Chinese tax authority.
Documents for retention
The documents to be retained by the non-resident taxpayer for follow-up administration by the Chinese tax authority include but may not be limited to:
- Tax residence certificate issued by the competent authority of the contracting state in which the taxpayer is resident;
- Documents evidencing ownership of the income received e.g. contracts, board resolutions, shareholder’s meeting minutes or payment advices;
- In the case of claiming treaty benefits for passive incomes e.g. dividends, interest and royalties, relevant documentation/information showing “beneficial ownership” of the passive income;
- Copies of passports of individuals and certificates of enterprises in the case of claiming treaty benefits under international transportation income;
Under the new procedures, a non-resident taxpayer only has to complete the simplified Information Reporting Form which should reduce the declaration burden. However, the non-resident taxpayer may still be subject to potential exposure relating to eligibility for the relevant treaty benefits because if the self-assessment is not properly supported by relevant documentation, the Chinese tax authority may possibly challenge the eligibility for the treaty benefits and may seek to disallow the benefits and impose interests and penalty accordingly. The self-assessment could pose a challenge to a non-resident taxpayer who does not have a comprehensive understanding of the relevant tax regulations.