Meaning
Statutory levies apply to the total amount of specific payments made to non-resident entities before any deductions or expenses are considered. The gross withholding tax is commonly applied to dividends, interest, royalties and certain service fees earned by foreign companies from sources within China. Unlike corporate income tax for resident firms, this tax does not allow for the subtraction of costs incurred in generating the income.
The domestic payer acts as the withholding agent and is legally responsible for deducting the tax and remitting it to the local tax bureau.
Taxable Base
The calculation of the liability relies on the full contract value rather than the net profit margin of the recipient. When a Chinese factory pays a licensing fee to a foreign parent, the gross withholding tax is calculated on the entire invoice amount. This ensures a simplified collection process for the tax authority, as it does not need to audit the expenses of a company located outside its jurisdiction.
Any attempt to artificially inflate costs to reduce the tax base is ineffective under this regime.
Collection Mechanism
Responsibility for the accurate assessment and payment of the gross withholding tax rests entirely with the Chinese entity making the payment. This agent must file a report and settle the tax within seven days of the payment being made or the contract becoming due. Failure to perform this duty results in the agent being held liable for the unpaid tax and potential administrative fines.
The bank processing the outbound remittance will usually verify that the tax has been settled before authorizing the transfer of funds.
Remittance Duty
Tax treaties often provide for a reduction in the standard ten percent rate of the gross withholding tax for residents of certain countries. To claim this benefit, the foreign recipient must provide a tax residency certificate and the Chinese agent must file the appropriate recordation. The local tax office retains the right to review these claims and may demand a full payment if the beneficial ownership requirements are not met.
This ensures that treaty benefits are only accessed by legitimate businesses with real economic substance.
