(Source: https://pltfrm.com.cn)
Income from licensing agreements received by foreign entities in China is subject to specific tax treatments. Here’s a general outline of how this income is typically taxed:
- Withholding Tax on Royalties:
- Income from licensing agreements, which is considered royalty income, is subject to withholding tax in China. The standard withholding tax rate for royalties is 10%, but this rate may be reduced under a Double Taxation Agreement (DTA) between China and the foreign entity’s home country.
- The Chinese entity that pays the royalties is usually responsible for withholding and remitting this tax to the Chinese tax authorities.
- Corporate Income Tax (CIT):
- If the foreign entity has a permanent establishment in China and the income from the licensing agreements is effectively connected with this establishment, it may be subject to CIT on this income. The standard CIT rate is 25%.
- The withholding tax paid on the royalties can be credited against any CIT liability.
- Value-Added Tax (VAT):
- Licensing of rights is also subject to VAT in China. The standard VAT rate for such services was historically 6%, but VAT rates are subject to change.
- The foreign entity may need to register for VAT and comply with VAT filing and payment requirements, or the Chinese client may be required to withhold VAT under the reverse charge mechanism.
- Impact of Double Taxation Agreements (DTAs):
- DTAs can significantly affect the taxation of royalty payments. They may provide for a reduced rate of withholding tax or specific exemptions. It’s important for the foreign entity to understand and apply the relevant DTA provisions.
- Transfer Pricing Considerations:
- If licensing agreements are between related parties, transfer pricing rules apply. The terms of the agreement should be consistent with the arm’s length principle to prevent tax adjustments by the authorities.
- Deductibility of Royalties for the Chinese Licensee:
- For the Chinese company paying the royalties, these payments are generally deductible for CIT purposes, provided they are reasonable and for business purposes.
- Tax Treatments in the Home Country:
- The foreign entity must also consider how this income is taxed in its home country. Tax credits or exemptions may be available under local tax laws for taxes paid in China.
Given the complexities of cross-border licensing and tax laws, foreign entities receiving royalties from China should seek professional advice. This ensures compliance with Chinese tax regulations and helps in understanding and applying the benefits of any relevant DTAs, ultimately optimizing their overall tax position.
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!
