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Q:
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My company is registered in Beijing, China. Recently, we have signed a royalty contract with a non-resident company and is planning to pay first year royalty to its overseas bank account. Can we go to the bank and transfer the funds directly?
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No. Before transferring the funds, the resident taxpayer needs to withhold and pay relevant tax on behalf of the non-resident taxpayer, and if the amount to be paid exceeds USD50,000, the resident taxpayer also needs to apply with tax authority for Payment Record Form.
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What are the taxes need to be withheld and paid?
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In relation to paying royalties to overseas non-resident, resident enterprise needs to withhold and pay enterprise income tax, VAT and surcharges on behalf of the non-resident.
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What is the rate of withholding enterprise income tax, VAT and surcharges respectively for paying royalty?
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The rate of withholding enterprise income tax for paying royalty to overseas non-resident is normally 10%, but if the country in which overseas non-resident is registered has tax treaty with China, the non-resident may enjoy lower rate under tax treaty agreement. The rate of VAT for royalty is 6%, and the rates of surcharges for urban construction tax, education charge and local education charge are 7%, 3% and 2% respectively on the base of VAT.
Besides, if the resident company is a general taxpayer, the withholding VAT paid can be used as input tax to offset against output tax.
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The country where the overseas non-resident company that signed contract with us located has tax treaty with China, how to enjoy the tax benefit under the tax treaty?
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The non-resident company which fulfills the requirements shall authorize its withholding agent (i.e. the resident company) to fill in the Report Form of the Tax Resident Identity Information of Non-Resident Taxpayers (Applicable to Enterprises) to verify its tax residency in its own country, and shall fill in and submit Report Form of the Information on Non-Resident Taxpayers' Enjoyment of the Treatment under Tax Agreements (Enterprise Income Tax, Form A) to enjoy the preferential rate under tax treaty.
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In order to enjoy the tax rate under tax treaty, what documents should we prepare?
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The overseas company needs to ask the tax authority of the country in which it is registered for issuance of tax resident certificate, then translate it into Chinese; while the domestic resident company needs to obtain the power of attorney from the non-resident as its agent.
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After obtaining the approval for enjoying the treatment under tax treaty, what documents should we prepare for withholding and paying the enterprise income tax?
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The domestic company needs to provide the royalty contract and its Chinese version to file the record with the tax bureau, a written application (applicable to contracts of withholding at source) according to the format required by tax authority, and fill in Report Form of the People's Republic of China for the Withholding of Enterprise Income Tax to declare and pay tax.
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My company is paying a royalty exceeding USD50,000, what should we prepare to obtain the Payment Record Form?
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The required documents may be a little bit different in different cities, but generally necessary documents include but not limited to the following:
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Original royalty contract and its Chinese version;
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Tax Payment Record Form for Goods or Services (digital);
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A written application stating all information required by tax authority;
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Other required documents and information.
The specific materials and requirements are subject to the local tax authority.
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