(Source: https://pltfrm.com.cn)
Royalties from software or patents received by foreign businesses from China are subject to specific tax treatments under Chinese tax law. Here’s how these royalties are generally taxed:
- Withholding Tax on Royalties:
- Royalties paid to foreign businesses for the use of software or patents in China are subject to withholding tax. The standard rate is 10%, but this rate can vary depending on the provisions of any applicable Double Taxation Agreements (DTAs) between China and the foreign business’s home country.
- Corporate Income Tax (CIT):
- If the foreign business has a permanent establishment in China, and the royalties are effectively connected with this establishment, the royalties may be subject to CIT at the standard rate of 25%. The withholding tax paid can typically be credited against the CIT liability.
- Value-Added Tax (VAT):
- Royalties for the use of software or patents are also subject to VAT. As of my last update, the standard VAT rate for such services was 6%, but this is subject to change.
- There might be VAT exemptions or preferential treatments available for certain types of software or patents, especially if they are considered advanced technology.
- Applicability of Double Taxation Agreements:
- DTAs can significantly affect how royalties are taxed. They may provide for a reduced withholding tax rate or specific exemptions. It’s important for the foreign business to understand and apply the relevant DTA provisions.
- Deductibility of Royalties:
- For the Chinese payer, royalties paid to a foreign business are generally deductible for CIT purposes, subject to compliance with China’s transfer pricing rules and the arm’s length principle.
- Transfer Pricing and Documentation:
- Transactions involving royalties between related parties must comply with transfer pricing rules. Adequate documentation must be maintained to demonstrate that the transactions are conducted at arm’s length.
- Tax Treatments in the Foreign Business’s Home Country:
- The foreign business must also consider how these royalties are taxed in its home country. Tax credits or exemptions may be available under local tax laws for taxes paid in China.
- Reporting and Compliance:
- Both the Chinese payer and the foreign recipient of the royalties have reporting obligations. The foreign business must comply with any Chinese regulatory requirements for remittance of royalties abroad.
Foreign businesses receiving royalties from China should seek professional advice to navigate the complex tax landscape, ensure compliance with both Chinese and home country tax laws, and optimize their tax position. Understanding the specific provisions of relevant DTAs and maintaining proper documentation are key aspects of managing tax liabilities effectively.
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