China Tax & Investment Express

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1 China Tax Center China Tax & Investment Express Issue No Jan 2017 (CTIE)* brings you the latest tax and business announcements on a weekly basis. CTIE provides a synopsis of each announcement including a link that leads you to the full content of the announcement (in Chinese). Please feel free to contact your EY client service professionals for further assistance if you find the announcements have an impact on your business operations. CTIE does not replace our China Tax & Investment News* which will continue to be prepared and distributed to provide more indepth analyses of tax and business developments in China. *If you wish to access the previous issues of CTIE and China Tax & Investment News, please contact us. Tax circulars Public notice (PN) regarding further improvement of policies related to the clauses pertaining to teachers and researchers in tax treaties (SAT PN [2016] No. 91) Certain double tax agreements/arrangements (hereinafter referred to as the DTAs ) concluded by the People s Republic of China (PRC) contain a clause pertaining to teachers and researchers. This then grants a tax exemption for a period as prescribed in the DTA in a contracting State for remuneration derived by a qualifying teacher or researcher (who is resident of the other contracting State) from teaching or carrying out research in an officially recognized school, institute, university, or any other educational or research institution in the first-mentioned contracting State. On 29 December 2016, the State Administration of Taxation (SAT) released SAT PN [2016] No. 91 ( PN 91 ) to further elaborate the aforementioned policy.

2 Expanded definition for the term of an officially recognized school, institute, university, or any other educational or research institution in the PRC According to PN 91, an officially recognized school, institute, university, or any other educational or research institution in the PRC refers to a school providing preschool education, primary education, secondary education, higher education or special education, which includes the following: A kindergarten A primary school or primary school for adults An ordinary junior secondary school or vocational junior secondary school An ordinary high school or high school for adults A technical secondary school ( 中专 ) or technical secondary school for adults ( 成人中专 ) A vocational high school ( 职业高中 ) A technical school ( 技工学校 ) A special needs school A school for children of foreign nationals An ordinary institution of higher learning ( 普通高校 ) or a higher vocational school ( 高职 ( 专科 ) 院校 )or higher education institution for adults ( 成人高等学校 ) However, a training institution of any kind should not be covered in the afore-mentioned scope. The previously released Guoshuihan [1997] No. 37 ( Circular 37, i.e., Notice regarding the applicable scope of clauses pertaining to teachers and researchers in tax treaties) only limited the scope of a school, institute, university, or any other educational or research institution in the PRC as full-time institutions of higher education (tertiary institutions or above) recognized by the Ministry of Education and approved by the State Administration of Foreign Experts Affairs to hire foreign teachers and researchers. PN 91 widely expanded the scope. Updated documentation requirement for the application of treaty benefits According to PN 91, non-residents who would like to apply for the abovementioned tax exemption should submit the required documents 1 as prescribed in Article 7 of SAT PN [2015] No. 60 ( PN 60, i.e., the Administrative Measures on Non-residents Enjoying Treaty Benefits ), which include copies of their valid foreign expert s certificate, alien employment work permit or foreigner s work permit card. Effectiveness PN 91 became effective on its promulgation date, i.e., 29 December 2016 and shall apply to any unsettled matters in this regard. The effectiveness of PN 91 revoked Article 1 of Circular 37 and Guoshuifa [1994] No. 153, i.e., Notice regarding the implementation of the clauses pertaining to teachers and researchers in tax treaties (official link cannot be located) at the same time. 1 According to Article 7 of PN 60, non-resident taxpayers or their withholding tax agents should submit the following documents for the application of treaty benefits for teachers and researchers: Information Reporting Form of Tax Residence Status of Non-resident Taxpayers (For Individuals) (i.e., Attachment 2 of PN 60) Reporting Form for Non-resident Taxpayers Claiming Tax Treaty Benefits (Form D for Individual Income Tax) (i.e., Attachment 10 of PN 60) Tax resident certificate issued by the competent tax authority of the other contracting State at or after the beginning of preceding calendar year of the tax filing in the PRC Relevant agreements, contracts related to the remuneration Other documents required (e.g., copies of valid foreign experts certificate, alien employment work permit or foreigner s work permit card. 2

3 You can click this link to access the full content of PN 91: You can click this link to access the full content of the Interpretation of PN 91 from the SAT: You can click this link to access the full content of PN 60: You can click this link to access the full content of Circular 37: PN regarding the modification of two Corporate Income Tax (CIT) related regulatory documents (SAT PN [2016] No. 88) For proper implementation of the State Council s decision on cancellation and adjustment of certain administrative approval items and the preferential CIT policies for qualifying small and micro-sized enterprises, the SAT released SAT PN [2016] No. 88 ( PN 88 ) on 29 December 2016 to make revisions of two CIT related regulatory documents: Administration of branches of enterprises from which 100% of CIT revenue is fully attributed to the central government PN 88 revokes Articles 2 and 3 2 of Guoshuihan [2010] No. 184 ( Circular 184, i.e., Notice regarding CIT collection and administration of certain state-owned enterprises (e.g. the Industrial and Commercial Bank of China)). According to PN 88, CIT treatments for losses incurred by the second tier or lower-tier branches of enterprises from which 100% of their CIT revenue is fully attributed to the central government (hereinafter referred to as the branches ) should be applied to SAT PN [2011] No. 25 ( PN 25, i.e., the Administrative Measures on the Deduction of Asset Losses for CIT Purposes), i.e., the record filing procedures. PN 88 also stipulates that if there is any changes in the list of branches, the record filing procedures as prescribed in Article 2 of SAT PN [2015] No. 6 ( PN 6, i.e., PN regarding strengthening the follow-up administration of the cancellation of administrative approval requirements for three CIT related items) should be completed. (Please refer to CTIE for details of PN 6.) Preferential CIT policies for qualifying small and micro-sized enterprises To expand the scope of small and micro-sized enterprises that are eligible for the preferential CIT policies, the SAT released SAT PN [2014] No. 23 ( PN 23, i.e., PN regarding expanding the scope of enterprises eligible for the CIT preferential policies for qualified small and micro-sized enterprises) which stipulates that, from 2014, qualifying small and micro-sized enterprises that are taxed on an actual basis or deemed basis would be eligible for the preferential CIT policies for qualifying small and micro-sized enterprises. In this respect, PN 88 revises Article 1.1 of Guoshuihan [2009] No. 377 ( Circular 377, i.e., Notice regarding issues related to levying CIT on a deemed basis) as follows: Enterprises that are eligible for one or more preferential CIT treatments as prescribed in the PRC CIT Law, its implementation rules and stipulations of the State Council (excluding those only enjoying tax exemption of income as prescribed in Article 26 of the PRC CIT Law and those are eligible for preferential CIT treatments for qualifying small and micro-sized enterprises as prescribed in Article 28 of the PRC CIT Law). The Interpretation of PN 88 from the SAT clarifies that the above revision aims to ensure the consistency of the prevailing tax regulations that qualifying small and micro-sized enterprises taxed on a deemed basis can also enjoy the preferential policies for qualifying small and micro-sized enterprises. 3

4 Effectiveness The stipulations of PN 88 involving PN 25 and PN 6 took retroactive effect on the respective implementation dates of PN 25 and PN 6. The stipulations of PN 88 involving the preferential CIT policies for qualifying small and micro-sized enterprises shall be applicable to annual CIT filing for year 2016 and onwards. 2 Articles 2 and 3 of Circular 184 prescribed the approval rights for losses incurred by second tier or lower-tier branches which would be required for administrative approval and provision of lists of second tier or lower-tier branches to the supervising tax authorities. PN 88 announces the revocation of Articles 2 and 3 as the stipulations therein are not consistent with that of PN 6 and PN 25. You can click this link to access the full content of PN 88: You can click this link to access the full content of the Interpretation of PN 88 from the SAT: You can click this link to access the full content of Circular 184: You can click this link to access the full content of PN 25: You can click this link to access the full content of PN 6: You can click this link to access the full content of Circular 377: You can click this link to access the full content of PN 23: PN regarding the effectiveness and enforcement of the third protocol to the Arrangement between the Mainland China and the Macao Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (SAT PN [2016] No. 89) On 29 December 2016, the SAT released SAT PN [2016] No. 89 ( PN 89 ) regarding the effectiveness and enforcement of the third protocol (hereinafter referred to as the Third Protocol ) to the Arrangement between the Mainland China and the Macao Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as the Macao DTA ). The Third Protocol was signed on 19 July 2016 and became effective on 12 December The Third Protocol makes the following revisions to the Macao DTA: The Third Protocol revises Article 8.1 of the Macao DTA as follows (the revisions are underlined): Revenue and profits derived from the operation of ships, aircraft or land transport vehicles carried on by an enterprise of One Side shall be exempt from tax on the Other Side (in the Mainland China, the taxes exempted include Value-added Tax (VAT) and other similar taxes). The Third Protocol adds the following provision in Article 12.2: For royalty payment related to aircraft and ships, the tax so charged shall not exceed 5% of the gross amount of the royalties. The applicable tax rates for all other cases remained unchanged. 4

5 The Third Protocol adds the main purpose test for the application of treaty benefits under Article 10 (dividends), Article 11 (interest), Article 12 (royalties) and Article 13 (capital gains) in order to avoid treaty shopping. Relevant enterprises and individuals of the Mainland China and Macao should be aware of the changes brought about by the Third Protocol. You can click this link to access the full content of PN 89: You can click this link to access the full content of the Interpretation of PN 89 from the SAT: You can click this link to access the full content of the Macao DTA and the Third Protocol: PN regarding the effectiveness and enforcement of the Agreement between the Government of the PRC and the Government of the Republic of Zimbabwe (Zimbabwe) for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (SAT PN [2016] No. 90) On 29 December 2016, the SAT released SAT PN [2016] No. 90 ( PN 90 ) to announce that the Agreement between the Government of the PRC and Zimbabwe for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (hereinafter referred to as the PRC-Zimbabwe DTA ) signed on 1 December 2015 became effective and enforced on 29 September 2016 and will apply to income derived on or after 1 January (Please refer to CTIE for details of the PRC-Zimbabwe DTA.) Our observations Key contents of the PRC-Zimbabwe DTA include: Provisions Permanent establishment (PE) Withholding tax rates Capital gains Construction PE 3 Service PE 4 PRC-Zimbabwe DTA Dividends 2.5% 5 /7.5% Interest 7.5% Royalties 7.5% Gains from disposal of shares in a land-rich company Gains from disposal of shares in a nonland-rich company Independent personal services A period of more than twelve months A period or periods aggregating more than six months within any twelve-month period Gains derived by a resident of a Contracting State from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State. Gains derived by a resident of a Contracting State from the alienation of shares other than those mentioned above representing a participation of at least 50% in a company which is a resident of another Contracting State may be taxed in that State. No such article The PRC-Zimbabwe DTA grants a 2.5% withholding tax rate to dividends if the beneficial owner of the dividends is a resident of the other Contracting State which controls directly or indirectly at least 25% of the company paying the dividends. It is noteworthy that this DTA established the second lowest withholding tax rate on dividends of any DTA concluded between the PRC and a foreign country/region (the lowest withholding tax rate on dividends is granted in the PRC- Georgia DTA, i.e., 0% on qualifying dividends). 5

6 3 The construction PE refers to a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last for a prescribed period of time. 4 The service PE refers to furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue within the other Contracting State for a prescribed period of time. 5 In cases where the beneficial owner of the dividends is a resident of the other Contracting State which controls directly or indirectly at least 25% of the company paying the dividends, the withholding tax rate on dividends shall be reduced to 2.5%. You can click this link to access the full content of PN 90: You can click this link to access the full content of the Interpretation of PN 90 from the SAT: You can click this link to access the full content of the PRC-Zimbabwe DTA: PN regarding a list of charitable social organizations eligible for the deduction of charitable donations for income tax purposes for year 2015 (MOF/SAT/MCA PN [2016] No. 155) According to the PRC CIT Law and its Implementation Rules, as well as Caishui [2015] No. 141 ( Circular 141, i.e., Notice regarding administrative matters after the cancellation of approval for the recognition of qualifying charitable organizations through which charitable donations made are deductible for income tax purposes), the Ministry of Finance (MOF), SAT and Ministry of Civil Affairs (MCA) jointly released MOF/SAT/MCA PN [2016] No. 155 ( PN 155 ) on 14 December 2016 announcing a list of charitable social organizations (hereinafter referred to as CSOs ) through which charitable donations are deductible for income tax purposes for the year (Please refer to CTIE for details of Circular 141.) According to the CIT Law, in general, a company s charitable donations to approved CSOs are deductible for CIT purposes for up to 12% of its total annual profits calculated in accordance with the PRC Accounting Standards. For individuals, charitable donations to approved CSOs are fully deductible for Individual Income Tax purposes. You can click this link to access the full content of PN 155: ml You can click this link to access the full content of Circular 141: Business circular Notice regarding the revised Administrative Measures for the Reporting of Large and Suspicious Transactions by Financial Institutions (PBC Order [2016] No. 3) On 28 December 2016, the People s Bank of China (PBOC) released the revised Administrative Measures for the Reporting of Large and Suspicious Transactions by Financial Institutions (hereinafter referred to as the Revised Administrative Measures ) via PBOC Order [2016] No. 3. The Revised Administrative Measures will become effective on 1 July

7 According to the Revised Administrative Measures, the financial institutions obligated to report large and suspicious transactions refer to the below financial institutions incorporated within the territory of the PRC: Policy banks, commercial banks, rural cooperative banks, rural credit cooperatives, rural banks Securities companies, futures broker companies and fund management companies Insurance companies, insurance asset management companies, insurance agency companies and insurance brokerage companies Trust companies, financial asset management companies, finance companies, financial leasing companies, consumer finance companies, automobile finance companies, currency brokerage companies and mortgage companies Other institutions determined and named by the PBOC The abovementioned financial institutions shall report the following large transactions: Any single cash transaction with the value or any series of cash transactions with the accumulated value in a single day for RMB50,000 or above, or for US$10,000 equivalents or above in foreign currencies, such as cash deposit, cash withdrawal, sale and purchase of foreign exchange by cash, cash exchange, cash remittance, cashier s check payment and other cash transactions (The amounts stipulated in this criteria may be further adjusted by the PBOC if necessary) Any fund transfer of RMB2,000,000 or above, or US$200,000 equivalents or above in foreign currencies between bank accounts of a non-natural person customer and another bank account, either in a single or multiple transactions on a day Any domestic fund transfer of RMB500,000 or above or US$100,000 equivalents or above in foreign currencies between bank accounts of a natural person and another bank account, in a single or multiple transactions on the same day Any cross-border transaction of RMB200,000 or above, or US$10,000 equivalents or above in foreign currencies between bank accounts of a natural person and another bank account in single or multiple transactions on the same day The abovementioned accumulative amounts are calculated and reported on a unilateral transaction basis by a single customer according to receipts or payments of funds, unless otherwise stipulated by the PBOC. However, according to the Revised Administrative Measures, financial institutions are also required to carry out the reporting of large and suspicious transactions on the basis of reasonable doubts. Where the financial institutions find that there are reasonable doubts regarding their clients, clients funds/assets or transactions, or the intended transactions of their clients related to money laundering or terrorist financing, etc., the financial institutions should report the suspicious transactions regardless of the amount or value involved. It is understood that the issuance of Revised Administrative Measures aims to strengthen international cooperations on anti-money laundering, anti-terrorist financing as well tax base erosion. However, as crossborder transactions by domestic individuals are anticipated to be more rapid upon the launches of the Shanghai Hong Kong Stock Connect Program and the Shenzhen-Hong Kong Stock Connect Program, this initiative would require a specific and sophisticated monitoring system for the financial institutions to grasp the relevant data in a timely manner. In this respect, the Revised Administrative Measures shall be implemented on 1 July 2017 in order to grant a sufficient transition period to financial institutions. You can click this link to access the full content of Order 3: 7

8 Other business, customs and tax related circulars recently announced by central government authorities: Notice regarding a list of production materials imported for scientific research, technology development and education eligible for the exemption of import duties, import-level VAT and Consumption Tax (Caiguanshui [2016] No. 72) Notice regarding the exemption of import duties and import-level VAT on importing commodities for exploration of offshore oil (natural gas) during the 13th Five-Year Plan period (Caiguanshui [2016] No. 69) Notice regarding the tax policies of import duties and import-level VAT on importing commodities for exploration of petroleum (natural gas) from special areas on land during the 13th Five-Year Plan period (Caiguanshui [2016] No. 68) Notice regarding the public opinion consultation on certain procedural guidelines and practicing principles for tax-related services of certified tax agents (Zhongshuixiefa [2017] No. 1) Notice regarding a list of matters subject to random inspections (the first edition) (Gongshangqijianzi [2016] No. 259) PN regarding the 2017 Catalog of Goods under Import Licensing Administration (MOFCOM/GAC/AQSIQ PN [2016] No. 85) Notice regarding the 2017 Catalog of Goods under Export Licensing Administration (MOFCOM/GAC PN [2016] No. 86) PN regarding the Catalog of Dual-use Items and Technologies Subject to Import & Export Licensing Administration (MOFCOM/GAC PN [2016] No. 87) Notice regarding a list of National Enterprise Technology Centers in 2016 (Fagaigaoji [2016] No. 2680) PN regarding the adjusted measures of customs tariff for year 2017 (GAC PN [2016] No. 89) PN regarding the adjustment of certain agricultural products originated from Taiwan that are eligible for import tariff exemption (GAC PN [2016] No. 88) PN regarding the administration of transfers of bonded goods in special customs supervision zones and bonded supervision areas (GAC PN [2016] No. 86) PN regarding the adjustment of the commodity codes of certain imported goods subject to anti-dumping duties (GAC PN [2016] No. 90) 8

9 Contact us For more information, please contact your usual EY contact or one of the following of EY s China tax leaders. Office Tax Leaders Martin Ngai (Beijing) martin.ngai@cn.ey.com Fisher Tian (Tianjin) fisher.tian@cn.ey.com Samuel Yan (Dalian/Shenyang) samuel.yan@cn.ey.com Lucy Wang (Qingdao) lucy-c.wang@cn.ey.com Joanne Su (Xi an) joanne.su@cn.ey.com Vickie Tan (Shanghai) vickie.tan@cn.ey.com Raymond Zhu (Wuhan) raymond.zhu@cn.ey.com Audrie Xia (Suzhou) audrie.xia@cn.ey.com Andrew Chen (Nanjing) andrew-jp.chen@cn.ey.com Patricia Xia (Hangzhou) patricia.xia@cn.ey.com Chuan Shi (Chengdu) chuan.shi@cn.ey.com Clement Yuen (Shenzhen) clement.yuen@cn.ey.com Rio Chan (Guangzhou/Changsha) rio.chan@cn.ey.com Jean Li (Xiamen) jean-n.li@cn.ey.com Tracy Ho (Hong Kong) tracy.ho@hk.ey.com Heidi Liu (Taipei) heidi.liu@tw.ey.com Service Line Tax Leaders Andrew Choy (International Tax) andrew.choy@cn.ey.com Paul Wen (People Advisory Services) paul.wen@hk.ey.com Kenneth Leung (Indirect Tax) kenneth.leung@cn.ey.com Travis Qiu (Transfer Pricing) travis.qiu@cn.ey.com Becky Lai (Tax Policy) becky.lai@hk.ey.com David Chan (Transaction Tax) david.chan@hk.ey.com Samuel Yan (Global Compliance & Reporting) samuel.yan@cn.ey.com Sector Leaders Henry Chan (Financial Services) henry.chan@cn.ey.com Alan Lan (Energy & Resources) alan.lan@cn.ey.com Martin Ngai (Technology, Media, Telecommunications) martin.ngai@cn.ey.com Vickie Tan (Life Science) vickie.tan@cn.ey.com Gary Chan (Real Estate) gary.chan@cn.ey.com Audrie Xia (Consumer Products) audrie.xia@cn.ey.com Walter Tong (Automotive & Transportation) walter.tong@cn.ey.com Raymond Zhu (Government & Public Sector) raymond.zhu@cn.ey.com Greater China Tax Leader Henry Chan henry.chan@cn.ey.com Author China Tax Center Jane Hui jane.hui@hk.ey.com 9

10 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young, China All Rights Reserved. APAC No ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/china