PRC Withholding Tax on H-Shares Dividends
September 19, 2008
Recently, various Chinese listed H-share companies disclosed in their 2008 interim announcements that a 10% PRC withholding tax will be deducted from dividend distributions to their non-individual shareholders according to the new PRC Enterprise Income Tax Law and the Implementing Rules of the PRC Enterprise Income Tax Law (“EIT Law”) which took effect on January 1, 2008.
Prior to the issuance of new EIT Law, foreign investors (including foreign enterprises and foreign individuals) were historically entitled to the following two exemptions according to a tax circular issued by the State Administration of Taxation (“SAT”) on July 21, 1993, i.e., GuoShuiFa [1993] No. 045 (“Circular 045”).
- An exemption from enterprise income tax withholding (“EIT”) and individual income tax withholding (“IIT”) on dividends derived from foreign invested enterprises (“FIEs”); and
- A temporary exemption from EIT and IIT on dividends derived from Chinese enterprises with respect to their H-shares/overseas shares or B-shares.
The first exemption from EIT was also contained in Article 19 of the prior Foreign Enterprise Income Tax Law (“
FEIT Law”) which was replaced by the new EIT Law on January 1, 2008. Under the new EIT Law, a non-PRC tax resident enterprise which derives Chinese-source dividends is generally subject to the EIT (in form of withholding) at a rate of 10% (subject to reduction by applicable tax treaty) and the first exemption for dividends from FIEs was clearly abolished. However, it is unclear whether the second tax exemption on dividends paid with respect to H-Shares or B-Shares companies was abolished. While a recent tax circular, CaiShui [2008] No. 1 (“
Circular 1”), states that
“any preferential enterprise income tax policies implemented before January 1, 2008 should be abolished unless it is addressed in the new EIT Law, tax circular GuoFa [2007] No. 39, tax circular GuoFa [2007] No. 40, or Circular 1” and the second exemption is not included in any of these tax circulars, it remains unclear whether the second exemption should be characterized as one of the many “preferential enterprise income tax policies” given the lack of a technical definition for this term.
In light of the above development, foreign investors receiving Chinese-source dividends should prepare to be withheld on as a matter of current administrative practice and should consult with their tax advisors with respect to seeking tax treaty protection or investigate other possibilities to manage this exposure.
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.
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