(Source: https://pltfrm.com.cn)
Income from franchising activities in China earned by foreign companies is subject to several tax treatments under Chinese law. The tax implications can vary depending on the structure of the franchise agreement and the nature of the income. Here are the main tax considerations:
- Corporate Income Tax (CIT):
- Foreign companies engaging in franchising activities in China are subject to CIT on their China-sourced income. The standard CIT rate is 25%.
- If the foreign company has a permanent establishment in China through its franchising activities, the income attributable to that establishment is subject to CIT.
- Withholding Tax:
- Franchise fees paid by Chinese entities to foreign franchisors are subject to withholding tax, typically at a rate of 10%. However, this rate may be reduced under a Double Taxation Agreement (DTA) between China and the foreign company’s home country.
- Withholding tax is usually levied on royalties or service fees that are part of the franchising arrangement.
- Value-Added Tax (VAT):
- Payments for franchising rights are generally subject to VAT. As of my last update, the standard VAT rate for such services was 6%, but this rate is subject to change.
- The Chinese entity that pays the franchising fees is responsible for withholding and remitting the VAT to the tax authorities.
- Stamp Duty:
- Franchise agreements may be subject to stamp duty in China. The rate is typically low but varies depending on the nature of the document.
- Transfer Pricing:
- Transactions between related parties, including franchising arrangements, must comply with transfer pricing rules. The terms of the franchising agreement should be consistent with the arm’s length principle.
- Double Taxation Agreements (DTAs):
- DTAs can provide relief from double taxation and may affect how franchising income is taxed. Foreign franchisors should review the relevant DTA to understand its implications.
- Reporting and Compliance:
- Foreign franchisors must comply with Chinese regulatory requirements, including tax filing and remittance procedures.
- Tax Treatments in the Home Country:
- Foreign franchisors must also consider the tax treatment of their franchising income in their home country. Tax credits or exemptions may be available for taxes paid in China.
Given the complexities involved in international franchising and the nuances of Chinese tax law, foreign companies are advised to seek professional tax advice. This ensures compliance with local regulations and optimizes the overall tax position of the franchising activities.
PLTFRM is an international brand consulting agency that works with companies such as Red, Tiktok, Tmall, Baidu, and other well-known Chinese internet e-commerce platforms. We have been working with Chile Cherries for many years, reaching Chinese consumers in depth through different platforms and realizing that Chile Cherries exports in China account for 97% of the total exports in Asia. Contact us and we will help you find the best China e-commerce platform for you. Search pltfrm for a free consultation!
