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China: New Tax Reporting Rules for Overseas Investments of Resident Enterprises

(July 9, 2014) On June 30, 2014, China’s State Administration of Taxation (SAT) issued a public notice regarding information about overseas investment and income that Chinese resident enterprises must report. When the Notice takes effect on September 1, 2014, the SAT’s oversight of these enterprises’ foreign investment and income will be strengthened. (Guanyu Jumin Qiye Baogao Jingwai Touzi he Suode Xinxi Youguan Wenti de Gonggao [Notice on Resident Enterprises’ Reporting of Information on Overseas Investments], SAT Announcement [2014] No. 38 (June 30, 2014), SAT website.)

Under the Notice, resident enterprises must report to competent tax authorities their direct or indirect holdings of ten percent or more in foreign enterprises and any subsequent changes in those holdings, within 15 days of the end of each month or quarter when the enterprise income tax is prepaid. Specifically, a resident enterprise must report if:

  • as of September 1, 2014, the resident enterprise holds ten percent or more shares of a foreign enterprise;
  • after September 1, 2014, the resident enterprise’s holding of the shares of a foreign enterprise reaches ten percent or more; or
  • after September 1, 2014, the resident enterprise’s holding of shares of a foreign enterprise decreases from ten percent or more to under ten percent. (Id. art. 1.)

In addition, competent tax authorities may require any necessary information regarding a resident enterprise’s overseas income during tax investigations. (Id. art. 3.)

Non-resident enterprises that have establishments (i.e. representative offices, factories, or business agents) in China and have income derived from outside of China that has an actual relationship with their Chinese establishments are also subject to the new reporting rules. (Id. art. 7.)

China’s Enterprise Income Tax Law provides that resident enterprises are taxed on their worldwide income. Resident enterprises under Chinese tax law include not only enterprises incorporated in China under Chinese law, but also enterprises incorporated outside of China but with de facto management organs in China. (Qiye Suodeshui Fa [Enterprise Income Tax Law] (promulgated by the National People’s Congress on Mar. 16, 2007, effective Jan. 1, 2008), arts. 2 & 3, 2007 FAGUI HUIBIAN 757-765; English translation available through Westlaw China by subscription.) Non-resident enterprises that have establishments in China are subject to Chinese enterprise income tax on their China-sourced income and on income derived from outside of China that has an actual relationship with their Chinese establishments. (Enterprises Income Tax Law, art. 3.) The Law applied a flat tax rate of 25% in general, starting in 2008. (Id. art. 4.)