Meaning
The administrative directive issued by the State Administration of Taxation that governs the withholding of corporate income tax on non-resident enterprises represents a critical regulatory guideline. This bulletin is administered by local tax authorities under the Corporate Income Tax Law of the People’s Republic of China. Under this administrative framework, the STA Bulletin 2017 No 37 simplifies the filing procedures and clarifies the calculation of taxable income for foreign enterprises that do not have a physical presence in China but derive income from Chinese sources.
The boundary of this application is focused on equity transfers, property rentals, interest payments and royalty distributions to non-resident entities. By implementing this directive, the Chinese government establishes a streamlined process for withholding tax while maintaining strict control over capital outflows.
Equity Transfer
The bulletin provides detailed instructions on how to calculate the taxable gain from the transfer of equity in a Chinese resident enterprise by a non-resident seller. This gain is calculated as the total transfer price minus the net book value of the equity being transferred. The STA Bulletin 2017 No 37 requires the buyer, acting as the withholding agent, to file the tax return and pay the tax to the local tax bureau within seven days of the transaction.
If the transaction is settled in foreign currency, the bulletin specifies the exchange rate that must be used to calculate the tax liability in Chinese yuan. In practice, the local tax bureau reviews the valuation of the equity to ensure that it reflects the fair market value of the Chinese enterprise.
Withholding Duty
The regulation places the primary responsibility for tax compliance on the buyer of the equity or the payer of the source income, who is designated as the withholding agent. If the withholding agent fails to withhold the required tax, the local tax bureau has the authority to collect the tax directly from the non-resident seller. The bulletin establishes penalties for withholding agents who do not fulfill their statutory duties, including fines and negative impacts on their corporate credit ratings.
This enforcement practice encourages domestic buyers to be extremely diligent when structured transactions with foreign sellers. The administrative process requires the withholding agent to register the transaction and submit the equity transfer agreement, the board resolutions and the payment receipts to the tax bureau.
Tax Clearance
Foreign investors must obtain a tax clearance certificate from the local tax bureau before they can repatriate the proceeds of an equity sale through Chinese banks. This certificate is granted only after the tax bureau has verified that the tax has been calculated correctly and paid in full. The STA Bulletin 2017 No 37 defines the documentation that the bank must inspect before processing the foreign exchange and transferring the funds offshore.
This requirement ensures that no untaxed funds are allowed to leave the country. In the current regulatory environment, the systematic execution of these tax filings is a fundamental step in any exit or restructuring strategy for foreign enterprises in China.
