China Eases Taxes for Foreign Companies

Christan Kober | Robert Harding World Imagery | Getty Images

China will cut taxes on the profits that foreign companies take out of the country by up to 50 per cent after rules on withholding taxes were relaxed to encourage more overseas investment.

The move will also apply to dividends paid by Chinese listed companies to foreign shareholders through the Qualified Foreign Institutional Investor scheme. In both cases, the lower tax rates will apply only to companies and shareholders based in countries, such as the UK, that have double taxation agreements with China.

The changes could save companies billions of dollars worth of tax payments, which might initially lead them to repatriate more profits, but ultimately should provide incentives for more investments, according to experts at KPMG. US companies, however, cannot benefit as they are taxed on a global basis by US authorities.

“The bigger picture is that because of the economic situation globally over the past couple of years, China sees the need to create a friendlier environment for foreign investors,” said Khoon Ming Ho of KPMG China. “This comes just as many companies are applying to make remittances of their half-year dividends.”

The relaxation of the rules comes after almost a year of consultation between Chinese tax authorities, tax experts and companies. The effect will be to make it much simpler and quicker to cut withholding taxes paid on dividends from 10 per cent to as little as 5 per cent, depending on the owner’s country of residence.

Last year almost $65bn worth of dividends was repatriated, according to the State Administration of Foreign Exchange, which manages the bulk of China’s foreign exchange reserves. KPMG said official data showed that Rmb45bn ($8.6bn) of withholding taxes were collected last year, which accounted for more than half of total corporate taxes paid in China by foreign companies.

Withholding tax reductions were first introduced in late 2009, but companies had to meet a long list of criteria that the vast majority failed to satisfy. Any company listed and resident in a country with a tax treaty with China will now automatically qualify for the relief on dividends from Chinese operations or wholly owned subsidiaries, according to two regional governments.