ABG Limited which is established in Mainland china in 1998 would now want to pay out dividends to Gamma Limited which is a private company incorporated in Hong Kong. What is the tax percentage to be paid by Hong Kong Company for the amount received by ABC Limited? According to the a completely rewritten corporate income tax law, the Enterprise Income Tax Law, that came into effect on 1 January 2008. The new system applies to both FIEs and ordinary domestic Chinese companies, with the contrast to the existing tax system. The taxation of FIEs is governed by a separate law, the Foreign Investment Enterprise Tax Law. It states that the dividend withholding tax exemption for FIEs is removed, so the generally applicable 20% withholding tax rate applies (the law allows the State Council to reduce or eliminate this tax, and it is expected that the Council will use its power to reduce the withholding rate to 10%, but not to nil) The 0% rate only applies to interest received by the Hong Kong Government or recognized institutions. Caishui (2008) No.130 (25 September 2008)-Computation of WHT on passive income. It states categorically that unlike the former treatment under the repealed FEITL, WHT is to be applied on the total amount of passive incomes (e.g. dividends, interest, rental, royalties, capital gains and so on) without any indication on the continuance of the deductibility of Business Tax in the WHT calculation. Future more Circular 130 reiterates that no other taxes or expenses (not limited to BT) can be deductible in calculating the WHT for non-resident companies (retroactively) effective from 1 January 2008. So up till now without the Double Taxation Arrangement ABC Limited would be required to withhold 10% of the amount payable to Gamma and distribute rest. On 21 August 2006 there was an arrangement signed between Hong Kong and China or the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income. According to the arrangement Article 10 talks about the reduced rates for dividends to be received by a Hong Kong resident from investments in Mainland enterprises will be reduced from 20% to 10%, and a Hong Kong business from 10% to 5%. If Gamma limited would like to enjoy the reduced rate of 5% on the dividend from ABC Limited. Gamma would have to do proof the following 2 requirements. 1. Gamma Limited holds at least 25% of capital in ABC limited the PRC Company. 2. Gamma Limited has to satisfy the “beneficial ownership test” in Mainland China as set out under Guoshuihan  No. 601 (“Circular 601”). After meeting these two requirements, Gamma Limited would be required to ensuring any offshore exit does not contravene Circular 698 if the Parent Company Alpha Limited intend to undertake an “Offshore Disposal” in the future. Gamma Limited is required to meet the above two requirements plus not contravene Circular 698. If Gamma is successful to proof the hold a minimum stake of 25% in ABC Limited and they can satisfy the beneficial ownership test and not contravene Circular 698. Gamma Limited would be allowed to receive the 5% Tax credit and only be liable to pay a 5% Withholding Tax But if Gamma limited is not able to proof anyone or both of the requirements or it contravene Circular 698. Gamma limited would be required to pay at the rate of 10% for the dividend or if Gamma limited is hold by another company which is in a country that has double taxation arrangement with PRC and can satisfy the beneficial ownership test in PRC. A declaration may be made under Bulletin 30 such that the Company holding Gamma can enjoy the reduced tax rate. Example is Nanjing case, the company was not able to proof that they are the beneficial owner and therefore did not qualify for tax-free treatment under Caishui  No. 59 and could not enjoy the 5% rate.
What is Guoshuihan  No. 601? Guoshuihan  No. 601(“Circular 601”) deals with the requirements in double tax...
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