China’s State Administration of Taxes (SAT) has announced a relaxation of the rules governing the withholding tax that foreign investors have to pay on dividends repatriated from their share of investments in Chinese companies. Companies and shareholders based in countries outside Mainland China (such as the United Kingdom, Hong Kong and Singapore) that have double taxation agreements (DTAs) with China will only have to pay 5% in withholding tax on the dividends they receive from Chinese companies, instead of the usual 10% payable by companies and shareholders resident in countries without DTAs.
Although the reduced rate has actually been available since 2009, parent companies resident in countries with bilateral DTAs with China will now find it easier to qualify for the reduced rate under more relaxed criteria. Previously, for example, there was a stipulation that the direct parent company of the Chinese subsidiary should have a substantial active business in their country of residence, which was difficult to demonstrate when the parent was, in many cases, a holding company.
It was reported by SAT that the equivalent of nearly USD65bn in dividends was repatriated by foreign companies from China in 2011. It is hoped that, while the tax reduction could encourage companies to repatriate more dividends out of their current investments, the clarification could provide a tax incentive for more investments in the future.
