New Chinese Corporate Tax Regime May Catch Foreign Investors

by Mary Swire, for LawAndTax-News.com, Hong Kong

30 May 2007

Under China's new Corporate Income Tax Law, due to come into effect on 1st January, 2008, holding companies for Chinese investments should be based in tax-treaty countries in order to escape double taxation, says Danny Po of PricewaterhouseCoopers in Hong Kong.

Mr Po, PwC's Greater China M&A Tax Services partner, says that while under the current regime, known as the Foreign Enterprise Income Tax ("FEIT") law, withholding tax of 20% on dividends from foreign investment enterprises to their foreign owners is exempted altogether or reduced (for other passive income) from 20% to 10%, the new CIT Law states that the standard WHT rate will be 20%. It is silent on whether or not the existing withholding tax exemptions will be kept intact.

In addition, the new law will contain a generalized anti-avoidance provision which may catch income or capital flows to overseas investors, plus new rules to clarify corporate tax residence which may cover firms whose executives habitually spend time inside China.

Detailed Implementation Rules for the new CIT Law are due to be issued later in 2007, and may clarify matters, but Mr Po says that in the interim, investors should make sure that their offshore holding companies are established in countries, such as Hong Kong, with favourable Mainland tax treaty arrangements.

On the other hand, says Mr Po, venture capital investors can still consider setting up a venture capital enterprise inside China to take advantage of sectoral tax incentives which are expected to be introduced under the new CIT Law.

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