Case Study: Tax Withholding for Non-Resident Foreign Enterprises

Case Study: Tax Withholding for Non-Resident Foreign Enterprises

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scenario

Tax Declaration Procedure

Step 1. The company should electronically file VAT, VAT surcharges, stamp-tax and enterprise income tax (EIT) with the local tax bureau.

According to China’s Corporate Income Tax Law, the applicable EIT rate for this type of non-resident enterprise (without an office in China or deriving income unrelated to such an office) shall be 20 percent. Notably, the applicable EIT rate can be as high as 25 percent for other types of non-resident enterprises (e.g., those deriving income from an office established within China). The general formula for calculating EIT is as shown below (assuming that the relevant contract includes tax):

EIT payable = Contract price ×applicable profit rate stipulated by the tax authority × applicable EITrate (i.e., 20 or 25 percent)

The profit rate ranges from 15 percent to 50 percent, depending on the type of services provided. Specifically, theprofit rate shall be:

  • 15 percent to 30 percent for services such as design and consulting;
  • 30 percent to 50 percent for management services; and
  • Over 15 percent for other services.

 

In this case, assuming a contract price of RMB 1 million, the profit rate is 25 percent (given that design services fall within the 15 percent to 30 percent range) and the EIT rateis 20 percent. Therefore, the EIT payable should be:

EIT payable = RMB 1 million × 25%×20% = RMB50,000

Generally, the VAT rate for such projects shall be six percent. The relevant calculation method is as shown below:

VAT payable = Sales volume ×applicable VAT rate

vat-payable

Step 2. The company should apply to the local tax bureau for approval offoreign currency online payments .

Step 3. The company should submit the relevant documents to the local taxbureau to obtain a tax certificate and collect the approval certificate from Step 2. This requires the following:

  • Contracts signed between the two parties for the provision of services
  • Invoices
  • Tax payment invoices
  • Other relevant materials

Step 4. The company should make a bank transfer of the taxes owing.

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