New rules regarding entitlement to treaty benefits for non-resident taxpayers in China

On 14 October 2019, the State Taxation Administration (STA) released the announcement on “Issuing the Administrative Measures for Non-resident Taxpayers’ Entitlement to Treaty Benefits” (Announcement). According to the Announcement, non-resident taxpayers in China are no longer required to submit supporting documents to the tax authority in China before they can enjoy tax benefits under the tax treaty between China and their home countries. The Announcement will become effective on 1 January 2020 in replacement for the “Administrative Measures for Non-resident Taxpayers’ Entitlement to Tax Treaty Benefits” promulgated in 2015 (Original Measures).

Major changes

Below are the major changes in the Announcement comparing with the Original Measures: 

 1.

Definition of non-resident taxpayer

 Under the Announcement, a “non-resident taxpayer” is defined as a taxpayer who is a tax resident of the other contracting party in accordance with the provisions of the residents clauses of the relevant tax treaty. The relevant provisions under the PRC tax laws will no longer be used as the basis for determination purpose.

 2.

Simplification of tax declaration procedures

Instead of choosing and filing the correct forms out of ten prescribed forms and submitting the supporting documents in accordance with the Original Measures, a non-resident taxpayer only needs to complete and submit an Information Reporting Form for Entitlement to Treaty Benefits for Non-resident Taxpayers (Reporting Form) in order to enjoy the relevant tax treaty benefits when the taxpayer declares and pays the relevant taxes in China. Only basic information of the non-resident taxpayer and a statement of compliance with the Announcement are required in the Reporting Form.

 3.

Retention of supporting documents

Although supporting documents are no longer required to be submitted to the tax authority for filing in advance, a non-resident taxpayer is still required to properly collect and retain the supporting documents for 10 years and provide the same to the tax authority for review, if so required. Requirements for the relevant information are basically the same as the Original Measures, but documents for proof of the status of "beneficial owner" for a non-resident taxpayer to enjoy tax benefits for dividends, interests and royalty fees are particularly specified under the Announcement. Non-resident taxpayers shall not only be responsible for the authenticity and accuracy of the documents but also need to bear legal responsibility for their legality.

 4.

Liabilities of non-resident taxpayer and withholding agent

Non-resident taxpayers shall be fully responsible for the assessment and judgement of their eligibility for the treaty benefits, as well as the collection and retention of the relevant supporting documents. Provided that the information in the Reporting Form submitted by the non-resident taxpayer is completed as required, the withholding agent can make the corresponding tax withholding without the need to further check the non-resident taxpayer’s eligibility for tax benefits, the accuracy of the information in the Reporting Form, or the relevant supporting documents.

Our comments

The Announcement has, to a great extent, simplified the procedures for non-resident taxpayers to enjoy the tax treaty benefits. It will also reduce the burden of withholding agents to a certain extent as it is no longer necessary for them to act as a liaison between the non-resident taxpayer and the tax authority for the submission of supporting documents in the tax declaration process.

On the other hand, the Announcement will also bring some challenges and uncertainties to non-resident taxpayers and their withholding agents.

Firstly, non-resident taxpayers are required to conduct self-assessment of their eligibility for tax treaty benefits. If the tax authority considers that a taxpayer is not eligible and to have underpaid any tax, the taxpayer will need to pay the tax as required and the late charges incurred. Non-resident taxpayers may also be subject to a fine, and their credit records may accordingly be adversely affected. As such, non-resident taxpayers need to be familiar with the relevant requirements to make the appropriate assessment and right decision. The STA suggests, if necessary, a non-tax resident taxpayer may refer to the prescribed forms under the Original Measures to determine whether the taxpayer meets the conditions for entitlement to the treaty benefits. 

Secondly, non-resident taxpayers need to develop and/or improve their internal control policies to ensure that the relevant supporting documents for proof of their eligibility for the treaty benefits are properly collected and retained.

Thirdly, some of the provisions under the Announcement are general. Specific details may need to be further clarified by the local tax authorities as they implement them, which may cause uncertainties to non-resident taxpayers and withholding agents. The risk of non-compliance may therefore increase. If a non-resident taxpayer or a withholding agent is in any doubt, it would be advisable to seek advice from tax consultants and, if possible, to seek a preliminary opinion from the competent tax authority.