China Boosts Investment with Tax Changes

July 17, 2012 Taxation in China

Withholding taxes change in ChinaBEIJING – China is easing its tax rules on dividends payments to foreign companies, which could potentially lead to a significant influx of foreign investment and economic activity in the country.

Over the weekend tax authorities in China issued an official statement to clarifying the current rules regarding withholding taxes on dividend payments made by local companies to business entities registered outside of China.

Starting from June 29th 2012 companies in China paying dividends to a publically listed company in a country which has a double tax agreement with China will only pay a 5 percent withholding tax, compared to the normal rate of 10 percent.

Previously, Chinese companies paying dividends would need to apply to pay the lowered rate, and would undergo an assessment by Chinese tax authorities to determine whether they qualified. The paying company was also required to prove that the foreign company has a substantial presence in its country of registration, and is not a shell company.

The reduced withholding tax rate was originally implemented in 2009, but was considered to be too complicated, and many of the companies applying to pay the lowered tax were denied their request as they did not meet all the required criteria.

Tax experts in China have already come forward to say that the change could save companies billions in tax payments, and would significantly increase foreign investment into China.

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