KNOWLEDGE|
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Resident Enterprises
Resident enterprises (including enterprises established under foreign laws but deemed Chinese tax residents because their place of effective management is in China) may claim a credit for foreign enterprise income tax amounts directly paid and indirectly borne on their overseas income.
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Non-resident Enterprises
Non-resident enterprises (foreign enterprises) that have established an institution or place of business in China may claim a credit for foreign enterprise income tax amounts directly paid on income derived from outside China that is effectively connected with such institution or place of business.
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(1) |
Direct Credit
Direct credit allows an enterprise to credit foreign income tax paid directly by the enterprise itself on its overseas income against the enterprise’s Chinese tax liability. Direct credit mainly applies to foreign enterprise income tax paid on overseas business profits, as well as foreign withholding tax on dividends, bonuses, other equity investment income, interest, royalties, property transfer income, and other income derived from or arising outside China.
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(2) |
Indirect Credit
Indirect credit allows a Chinese resident enterprise to credit against its Chinese tax liability the portion of foreign income tax paid by a foreign enterprise on its pre-dividend profits that is indirectly borne by the Chinese resident enterprise on the dividend-type income it receives.
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(1) |
Choice and Limitation of Credit Method
Chinese enterprises may choose to calculate the credit on their overseas taxable income either on a per-country basis (per-country limitation method) or on an aggregate basis (overall limitation method). Special attention is required: once a method is chosen, it cannot be changed for five years.
Kaizen’s warm reminder: Enterprises should carefully make this decision based on their specific overseas arrangements. |
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(2) |
Documentation Retention Requirements
When claiming a foreign tax credit, enterprises must submit corresponding written documentation to their competent tax authorities based on their specific circumstances, including foreign tax payment certificates, financial statements, audit reports, etc.
Kaizen’s warm reminder: Incomplete or non-compliant documentation may result in the rejection of the credit claim. Please be sure to properly retain all relevant supporting documents. |
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(3) |
Credit Limitation and Excess Carryover Rules
Foreign taxes are not credited “dollar for dollar” against Chinese tax. Chinese tax law imposes a credit limitation, which is the amount of Chinese tax calculated on the overseas income at the domestic tax rate. If the actual foreign tax paid is below the limitation, the credit is allowed for the actual amount paid; if it exceeds the limitation, the credit is limited to the limitation amount.
Kaizen’s warm reminder: The excess amount may be carried forward and credited for the next five consecutive tax years, offset each year against the unused portion of that year’s limitation. Any portion not fully offset after the five-year carryover period expires permanently. Enterprises are advised to establish a tracking system for dynamic management to avoid losing the creditable amount.
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Disclaimer All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage. |
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