Synopsis

On 19 February 2013, the State Administration of Taxation (SAT) released SAT Announcement `2013` No. 9 (“Announcement 9”) clarifying certain issues related to the CIT filing for non-resident companies under the VAT pilot arrangements.  

Announcement 9 clarifies that the income derived by non-resident companies that have no organizations or establishments in China, or the income has no actual connection to the organizations or establishments inside China, the total income (hereinafter referred to as “passive income” ) excluding VAT shall be subject to CIT. 

Our observations   

Clarification of CIT calculation basis for passive income of non-resident enterprises under the VAT pilot arrangements

For the CIT treatment of passive income, Article 103 of the Provisional Rules of the CIT Law stipulates that, where withholding at source is to be adopted for CIT payable of a non-resident enterprise in accordance with the CIT Law, the taxable income shall be calculated pursuant to the gross income, i.e., total considerations and all other charges received by a non-resident enterprise from the PRC payer.  

Subject to the above, upon the launch of the VAT pilot arrangements, the tax authorities at the local level have adopted different approaches in determining the CIT payable for passive income as to whether it should be first converted into a VAT exclusive figure. The issuance of Announcement 9 clarifies that the CIT taxable passive income derived by non-residents should exclude VAT.

Calculation method

CIT payable = Total considerations received for the provision of services / (1+applicable VAT rate) x CIT rate  

Announcement 9 does not have retrospective effect, which means it would not be applied to any settled cases. However, for any unsettled cases in progress, taxpayers are recommended to discuss with the tax bureaus in charge for the application of Announcement 9.