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The State Administration of Taxation (“SAT”) released the “Public Notice on Issues concerning the Withholding of Corporate Income Tax at Source of Non-resident Enterprises (关于非居民企业所得税源泉扣缴有关问题的公告)”. The 37th announcement of the SAT released in October 2017 (“Announcement 37”), which replaces a series of circulars and provisions of circulars in respect of withholding of Corporate Income Tax (“CIT”) on Non-resident Enterprises (“NREs”), comes into effect on 1 December 2017. We highlight the changes set out by Announcement 37 below.
Filing of Relevant Contracts
1. Under the previous rules, the CIT withholding agent was required to complete a record filing procedure with its supervising tax authority (including registration of the relevant contract within 30 days after the contract is executed). This filing requirement has been removed such that unless requested by the supervising tax authority or otherwise required by law, withholding agents will not need to file the relevant contracts and other supporting documents.
Tax Payment by Instalments (for income derived from instalment sales)
2. Previously, where consideration for a transfer of offshore equity interests was settled by instalments, the entire income of the NRE transferor was recognized when the equity transfer agreement became effective and the share transfer completed. This meant that the CIT withholding agent could withhold an amount that exceeded the initial instalment payment. Announcement 37 will treat the instalment payments first as recovery of investment (such that tax could only be withheld after full recovery of such costs), and then allow for payment of tax by instalments.
Withholding Obligations on Dividends
3. The old rules mandated that CIT payable on dividends distributed by a China-resident enterprise to a NRE be paid on the date the decision to remit the dividends was made (i.e. the date the China-resident enterprise resolved to declare the dividend). This requirement is now abolished. Announcement 37 stipulates that where a NRE derives income from dividends, bonus dividends and other equity investments, withholding shall be made on the date of actual payment to the NRE (as the shareholder).
Tax Basis of Equity Transfers
4. Announcement 37 further clarifies the calculation of taxable income from equity transfers. Specifically:
(a) Income sourced from asset transfers in China shall include gains derived from the transfer of equity investment assets (i.e. equity transfers).
(b) Taxable income from equity transfers should be determined by reference to the difference between the transfer price (which may include non-monetary income) and the equity cost base (i.e. the actual capital contributed to the China-resident enterprise, or the consideration paid for equity ownership in such enterprise). If only part of an equity investment asset is transferred, its equity cost base can be calculated on a pro rata basis.
Foreign Currency Matters
5. Announcement 37 clarifies the timing of exchange rate conversion under three scenarios:
(a) Where CIT is to be withheld by a withholding agent, the amount payable shall be converted into RMB according to the exchange rate on the date the withholding obligation arises (i.e. when payment is actually made or becomes due).
(b) Where a NRE self-reports and files a tax return (before any order to do so by any competent tax authority), the relevant income shall be converted into RMB according to the exchange rate on the preceding day when the tax payment certificates are issued.
(c) Where a NRE is ordered by a competent tax authority to pay CIT by withholding at source within a prescribed period of time, the relevant income shall be converted into RMB according to the exchange rate on the date preceding the day that such order is made by the competent tax authority.
6. In addition, where a withholding agent must make payment in a foreign currency, Announcement 37 specifies that the transfer price or net value of the asset shall be converted into RMB first before calculating any gain regardless of the number of foreign currencies involved. Based on this, the applicable exchange rate shall be determined based on the rules outlined in the paragraph above.
Filing Deadline for NREs
7. Before Announcement 37, if a withholding agent did not withhold the applicable CIT, the NRE must complete tax filing and settle the CIT “within 7 days from the payment date or payment due date of the withholding agent”. Announcement 37 abolishes the seven-day time limit. Now, so long as the NRE declares its CIT payable and pays CIT to the competent tax authority (i.e. the tax authority having jurisdiction over the source of taxable income) within the time period prescribed by such tax authority, the NRE shall be deemed to have timely paid the CIT. Consequently, no fines, late fees or surcharges will be imposed.
Obligations of Withholding Agents
8. If the withholding agent fails to withhold and pay CIT for and on behalf of a NRE, the supervising tax authority may order the withholding agent to pay the CIT and impose a fine in the range of 50% to 300% of the unpaid CIT. If necessary, the tax authority may pursue unpaid CIT directly from the NRE.
9. Alternatively, if the withholding agent withholds CIT but does not timely pay the CIT to the tax authority, such tax authority may pursue the withholding agent for unpaid CIT and impose fines ranging from 50% to 500% of the unpaid CIT.
10. Withholding agents are still required to maintain books and files of account books and contracts in relation to any withholding.
Note: The rules under Paragraphs 3, 4 and 7 may apply to income that has already been accrued but not yet processed before Announcement 37 becomes effective.
In general, the rules introduced by Announcement 37 are more practical and should favour NREs as being more taxpayer friendly. However, Announcement 37 also places more burdens on withholding agents and obligates NREs to become more familiar with China’s tax withholding system. It is also unclear whether a NRE shall act as a withholding agent in a business transaction between two NREs. Practically speaking, it would be advisable for the two NREs to agree on how to deal with CIT payments specifically under such a scenario.
Announcement 37 will come into effect on 1 December 2017. On the same date, the Interim Administrative Measures for Source-based Withholding of Enterprise Income Tax on Non-resident Enterprises (非居民企业所得税源泉扣缴管理暂行办法), Circular of the State Administration of Taxation on Strengthening the Administration of Enterprise Income Tax on Incomes from Equity Transfers of Non-Resident Enterprises (国家税务总局关于加强非居民企业股权转让所得企业所得税管理的通知) and other provisions under certain tax regulations shall be simultaneously repealed.
 Circular Guoshuifa  No. 3
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