CMS, China | Chinese Tax Regulation Update | July 2019





CMS, China

Dear Sir or Madam,

Please find enclosed our update on the latest developments on Chinese Tax Law.

Kind regards,
CMS, China

Circular
Number
Issuance
Date
Effective
Date
Topic What is new?
Announcement [2019] No. 74, jointly released by the State Administration of Taxation (“SAT”) and the Ministry of Finance (“MoF”) 2019-06-13 2019-01-01 Individual Income Tax (“IIT”) taxable items of certain types of incomes The new PRC IIT Law has abolished the taxable item of “Other Incomes” under the old IIT Law. This Announcement clarifies the applicable taxation methods under the new IIT Law for taxable items that used to be taxed as “Other Incomes” under the old IIT Law.

1. The following incomes shall be now taxed under the taxable item of “Occasional Income” at a flat rate of 20%, which is the same as applicable to “Other Incomes” under the old IIT Law.
     
  a) Incomes for providing securities for individuals or organizations;
     
  b) Incomes due to receiving donation of real estate, excluding the situations under the circular Caishui [2009] No.78 where the receiver is the spouse, parent, child, grandparent, grandchild, sibling, supporter or heritor of the donator;
     
  c) Incomes due to receiving gifts, including gift money transferred via internet, from enterprises (other than the employer of the individual) during promotion / advertisement events, ceremonies, symposia or other events. However, consumer vouchers and coupons in nature of discount or sales rebate are not taxable.
     
2. IIT related to pension funds drawn from tax-deferred commercial pension insurance shall now be categorized as “salaries and wages”. The effective tax rate is stipulated in the circular Caishui [2019] No.22 - 25% of the pension income is tax-exempted, while the remaining 75% shall be taxed at 10%, leading to an effective tax rate of 7.5%. The insurance company shall withhold the relevant IIT.
SAT Announcement [2019] No. 28 2019-07-09 2020-01-01 Effectiveness of the protocol (“Protocol”) amending the Sino-Indian Double Taxation Treaty (“DTT”) The Protocol was officially signed on 26 November 2018 in New Delhi India as an amendment to the existing Sino-Indian DTT and its supplementary protocol. Key amendments are as follows:

1. Persons Covered

According to the Protocol, incomes derived by or through an Indian entity or arrangement which is “transparent” for tax purposes in India shall be considered incomes derived by an Indian tax resident covered by the Sino-Indian DTT, only to the extent that the income is treated, for the purpose of taxation in India, as the income of an Indian tax resident. Under such a circumstance, the qualified incomes derived by or through this entity can enjoy the DTT benefit. PRC entities shall enjoy identical treatment in India.

2. Resident

Under the old Sino-Indian DTT, if a person other than an individual is a resident of both China and India, the person should be recognized as the tax resident of the Contracting State where its head office is established for the purpose of application of the DTT.

According to the Protocol, however, residency of the person shall now be determined by the competent tax authorities of China and India through mutual agreement. In the absence of such agreement, the person shall not be entitled to any relief or exemption from tax provided by the Sino-Indian DTT, unless the competent authorities of China and India reach agreements with regard to the extent to which and the manner in which the person can enjoy treaty benefit under the Sino-Indian DTT.

3. Permanent Establishments (“PE”)

Construction PE

The Protocol makes it clear that only “the same building site or construction, installation or assembly project and related supervision activities” shall be referred to in determination of the 183-day rule for the threshold of constituting a construction PE.

The Protocol further includes clauses to prevent the abuse of the 183-day rule. According to the Protocol, if (1) an Indian enterprise carries out activities in China at a place that constitutes a building site or construction, installation or assembly project and these activities are carried out during one or more periods of time that aggregately do not exceed 183 days, and (2) connected activities are carried out at the same building site or construction, installation or assembly project during different periods of time, each exceeding 30 days, by one or more enterprises closely related to the first-mentioned Indian enterprise, these different periods of time shall be added to the period of time during which the Indian enterprise has carried out activities at the building site or construction, installation and assembly project for determination of 183 days for PE assessment. PRC enterprises shall enjoy identical treatment in India.
 
Service PE

The time threshold for constituting a service PE is revised to “more than 183 days within any 12 months’ period”.

The Protocol also makes it clear that only “the same or connected projects” shall be referred to in determination of the 183-day rule for service PE.

   
4. Business Profit

Article 7 Item 1 of the Sino-Indian DTT is revised. According to the Protocol, if an Indian enterprise runs business in China through a PE, the profits attributable to the PE can be taxed in China. PRC enterprise shall enjoy identical treatment in India.

5. Interest

Article 11 Item 3 of the Sino-Indian DTT is revised. According to the Protocol, interest arising in China and paid to the Government, a political subdivision or a local authority, the Central Bank or any financial institution wholly owned by the Government of India, or paid on loans guaranteed or insured by the Government, a political subdivision or a local authority, the Central Bank or any financial institution wholly owned by the Government of India, shall be exempt from tax in China. PRC entities shall enjoy identical treatment in India.

The Protocol defines the term of “Central Bank” and lists the names of the financial institutions entitled to the tax exemption.

6. Entitlement to Benefits

To avoid abuse of the DTT, the Protocol makes it clear that if obtaining benefits is one of the main purposes of any arrangement or transaction, treaty benefits shall not be granted.

The Protocol shall apply in China to the incomes gained on and after 1 January 2020 and in India to the incomes gained on and after 1 April 2020.
Announcement [2019] No. 78, jointly released by the MoF, the SAT and the China Securities Regulatory Commission (“CSRC”) 2019-07-12 2019-07-01 Extension of IIT policy for dividends received from the companies listed on the National Equities Exchange and Quotations (“NEEQ”)

This Announcement can be regarded as an extension of the old circular Caishui [2014] No.48, which expired on 30 June 2019. The Announcement has also integrated the relevant policies under the circular Caishui [2015] 101 which has partially replaced the circular Caishui [2014] No.48 since September 2015.

The expiration date of the validity period of IIT policy for dividends received from the companies listed on the NEEQ is now extended to 30 June 2024.

The existing IIT policies under the circular Caishui [2014] No.48 and the circular Caishui [2015] No.101 have been fully inherited by the Announcement. Besides, the Announcement makes it clear that the IIT policy also applies to dividends received from the companies delisted from the NEEQ. However, dividends related to the restricted shares of the companies delisted from the NEEQ shall be taxed according to the circular Caishui [2012] No.85.

This information is provided for general information purposes only and does not constitute legal or professional advice. Copyright by CMS, China.

For further information, please contact:

Gilbert Shen
Counsel
Head of Tax Practice Area Group
CMS, China
T
+86 21 6289 6363

F
+86 21 6289 0731
E
gilbert.shen@cmslegal.cn

 


This information is provided for general information purposes only and does not constitute legal or professional advice. Copyright by CMS, China.

CMS, China
“CMS, China” should be understood to mean the representative offices in Mainland China of CMS Cameron McKenna Nabarro Olswang LLP, CMS Francis Lefebvre Avocats and CMS Hasche Sigle, working together. CMS, China is a member of CMS Legal Services EEIG, a European Economic Interest Grouping that coordinates an organisation of independent member firms. CMS Legal Services EEIG provides no client services. Such services are solely provided by the member firms in their respective jurisdictions.

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