China Compliance and Record Filing Requirements
First, if a non-tax resident enterprise derives passive income, namely interest, dividend, rental, royalties, and capital gains, etc. from China, the payer of the income in China (also called Withholding Agent) is obligated to withhold and settle the withholding income tax (“WHT”).
The new compliance and filing requirements were released in January 2009 by the Chinese State Administration of Taxation coded Guohuifa  No. 3 (Circular 3). The new rules are intended to strengthen compliance.
New Registration Requirements for Withholding Agents
Withholding agents are required to:
- Register for tax withholding responsibilities with its local tax bureau within 30 days after any contract subject to withholding is entered into, revised, or extended
- Maintain detailed records for WHT payments and contracts and have them available for inspection by the tax authorities
- In case the income is paid in installments, a summary of all bank transactions, registration forms, and tax clearance certificates of previous payments are required to be filed with the local tax authority within 15 days before the final payment is made
Secondly, under the new rule, Business Tax (5% based on gross income) may not be deducted from gross income when computing WHT on royalties. Further, if there is an agreement between the withholding agent (the payer) and the non-tax resident enterprises that the WHT liabilities will be borne by the payer, the new rule will require a gross-up of taxable income when computing WHT. This will cause a higher amount WHT in China.
With some merger and acquisition deals, the equity transfer may involve two non-tax resident enterprises, in which case, the seller or its representative will be the withholding agent. If the direct owner of the Chinese target company has been changed, the target company is required to amend its tax registration, with respect to the change in shareholders, and submit a copy of the transfer agreement to the tax authority.
If a Chinese withholding agent fails to withhold the required WHT, the Chinese tax authorities are empowered to collect the tax due from any projects that the nonresident enterprise has in China.