In accordance with Enterprise Income Tax Law of the People’s Republic of China and its Implementation Regulations (hereinafter collectively referred to as “Enterprise Income Tax Law”), the issues with respect to the administration of non-resident enterprise income tax are hereby announced as follows:

1. Withholding of Enterprise Income Tax on Income Due and Payable but Unpaid

Where an enterprise within the territory of China (hereinafter referred to as the “enterprise”) concludes a contract or agreement with a non-resident enterprise with respect to income such as interest, rent, or royalties, and fails to pay such income on the date stipulated in the contract or agreement, or delays payment by amending or modifying the contract or agreement, provided that such income has been included in the Enterprise’s current costs and expenses and deducted in the annual enterprise income tax filing, the enterprise shall withhold and pay the enterprise income tax in accordance with the relevant provisions of Enterprise Income Tax Law when filing the annual enterprise income tax return.

If the enterprise does not recognize such unpaid income as a one-time expense in the current period, but includes it in the original cost of the relevant asset or as start-up expenses, and subsequently amortizes it into costs or expenses over multiple years upon the asset being put into use or commencing operations for deduction in the annual enterprise income tax filing, the enterprise shall withhold and pay enterprise income tax on the full amount of such income when filing the tax return for the year in which the relevant asset is recognized.

If the enterprise pays such income prior to the date stipulated in the contract or agreement, it shall withhold and pay the enterprise income tax in accordance with the relevant provisions of Enterprise Income Tax Law at the time of actual payment.

2. Tax Treatment of Guarantee Fees

A non-resident enterprise that receives guarantee fees sourced from within China shall calculate and pay enterprise income tax at the rate applicable to income from interest under Enterprise Income Tax Law. Such guarantee fees sourced from within China refer to fees or charges of a similar nature paid or borne by enterprises, institutions, or individuals within China for guarantees provided by non-resident enterprises in economic activities such as lending, trading, transportation of goods, processing and contracting, leasing, and engineering contracting.

3. Taxation of Gains from Transfer of Land Use Rights

Where a non-resident enterprise transfers land use rights within China without establishing an establishment or a place in China, or where such an establishment or a place is set up but the gains from the transfer of land use rights are not effectively connected with that establishment or place, the enterprise income tax shall be calculated and paid on the gains from the transfer, which shall be the balance of the total transfer income minus the tax basis. The withholding agent shall withhold and pay the tax at the time of payment.

4. Tax Treatment of Rental Income from Financial Leasing and Real Estate Leasing

(1) Where a non-resident enterprise, without an establishment or a place in China, leases equipment, articles, etc., to an enterprise within China through financial leasing, with ownership of the equipment or articles transferring to the enterprise within China upon lease expiration (including assignment thereof to the enterprise within China at an agreed price upon lease expiration), and the non-resident enterprise collects rent in accordance with the period agreed in the contract, the enterprise income tax shall be calculated and paid based on the income from loan interest, which is the balance of the lease fees (including the consideration for the assignment to the enterprise within China at an agreed price upon lease expiration) after deducting the price of the equipment or articles. The enterprise within China shall withhold and pay the tax at the time of payment.

(2) Where a non-resident enterprise leases immovable property such as houses or buildings located within China and does not establish an establishment or a place in China for its daily management, the enterprise income tax shall be calculated and paid on the full amount of the rental income received. The lessee within China shall withhold and pay the tax at the time of each payment or when payment is due.
If a non-resident enterprise dispatches personnel to China or entrusts other entities or individuals within China to conduct daily management of the aforementioned real estate, it shall be deemed to have established an establishment or a place in China. The non-resident enterprise shall file and pay the enterprise income tax by itself within the time limit prescribed by tax laws.

5. Withholding of Enterprise Income Tax on Dividends, Bonuses, and Other Equity Investment Income

Where a resident enterprise in China distributes dividends, profits, or other equity investment income to a non-resident enterprise that has not established an establishment or a place in China, the withholding enterprise income tax shall be withheld and paid on the date the profit distribution resolution is made. If the actual payment date precedes the profit distribution decision date, the withholding enterprise income tax shall be withheld and paid at the time of actual payment.

6. Issues With Respect to the Implementation of Circular of the State Taxation Administration on Strengthening the Administration of Enterprise Income Tax on Gains from Equity Transfers by Non-resident Enterprises (Guo Shui Han [2009] No. 698, hereinafter referred to as the “Circular”) 

(1) Where a non-resident enterprise directly transfers equity in a resident enterprise in China and the equity transfer contract or agreement stipulates payment by installments, the realization of income shall be recognized upon the contract or agreement taking effect and the completion of the equity change procedures.

(2) The phrase “purchasing and selling shares of resident enterprises in China on public securities markets” as mentioned in Article 1 of the Circular refers to transactions where the subject, quantity, and price of the shares are not predetermined by the parties but are determined in accordance with the customary trading rules of the public securities market.

(3) The term “overseas investor (actual controlling party)” in Articles 5, 6, and 8 of the Circular refers to all investors indirectly transferring equity interests in resident enterprises in China. The term “actual tax burden” in Article 5 of the Circular refers to the actual tax burden on the gains from the equity transfer, while “no income tax levied” means that no enterprise income tax is levied on the gains from the equity transfer.

(4) Where two or more overseas investors simultaneously indirectly transfer equity interests in a resident enterprise in China, one of them may submit the materials specified in Article 5 of the Circular to the tax authority in charge at the place where the resident enterprise in China is located.

(5) Where an overseas investor simultaneously indirectly transfers equity interests in two or more resident enterprises in China located in different provinces (municipalities), the investor may choose to submit materials to the tax authority in charge at the location of one of the resident enterprises in China in accordance with Article 5 of the Circular. The tax authority of the province (municipality) where that tax authority in charge is located shall consult with the tax authority of the other provinces (municipalities) to determine whether to levy taxes, and report it to the State Taxation Administration. If the decision is to levy taxes, the overseas investor shall pay the tax respectively to the tax authorities in charge at the places where each of the resident enterprises in China is located. 

7. This Announcement shall enter into force from April 1, 2011. Matters occurring prior to the implementation of this Announcement but have not yet undergone tax treatment shall be handled in accordance with this Announcement.

It is hereby announced.

State Taxation Administration
March 28, 2011

All information in this document is authentic in Chinese. English is provided for reference only. In case of any discrepancy, the Chinese version shall prevail.