Navigating Chinese Taxation – Insights for German Companies Part II: Cross-border Transactions Taxation Record Filing Requirements in China

published on 22 January 2024 | reading time approx. 3 minutes

Foreign invested enterprises often encounter cross-border transactions which may lead to tax consequence in China. Knowing how to process the taxation record filing for cross-border transactions would be definitely helpful for those enterprises either as taxpayers or withholding agents to mitigate their tax compliance risk and arrange the daily work more efficiently.

In this article, we will briefly introduce some selective commonly seen cross-border transactions and elaborate the corresponding taxation record filing requirements for reference.

Contract registration on withholding basis

The service contracts should be registered with the tax authority within 30 days upon the conclusion of the contracts. The important information about the signed contracts and a scanned copy should be submitted. If the service contracts are not registered within the specified time limit, it may have impact on the taxpayer’s credit rating.

For license fee, dividends, interests etc., it is not necessary to submit the signed contracts to competent tax authority upon the conclusion of the contracts. Instead, when the taxpayers or withholding agents perform the outbound non-trade payment record filings or tax declaration on withholding basis, some key wordings of the signed contracts will be collected by the competent tax authorities in the tax system.

Outbound payments which usually require record filing

In general, outbound non-trade payments over USD 50,000 are subject to payment record filing prior to the payment execution. On the other hand, some local banks may also require the corresponding withholding tax certificates if those items are taxable in China.

Please note that frequent payments under one contract, payment record filing is only required for the first payment. Subsequent payments can be made with the same payment recording filing number, while the bank system will automatically transfer the payment information to the tax system to alert the tax authority for tax collection.

Outbound payments which usually do not require record filing (selective samples）

Certain specific outbound payments over USD 50,000 are not required to make payment record filings. For details please refer to the Notice [2013] No. 40 of STA (“State Taxation Administration”) and SAFE (“State Administration of Foreign Exchange”). Below we only introduce a few selective samples which are commonly seen in daily operation:

The payment for expenses incurred outside of China for travelling, meeting, exhibition etc. usually does not require payment record filing. Please note that if such payments are not directly paid to offshore service providers, instead via overseas affiliated companies on reimbursement basis without markup, we suggest to check with local bank. In practice, for such payment via reimbursement for expenses over 12 months, local bank may not accept the direct outbound payment.
The payments for trade commission, insurance premiums, and compensation incurred outside of China usually do not require payment record filing. Nevertheless in practice if the commission does not appear to be reasonable comparing to the sales volume, it might be challenged by the local bank.
The reinvestment of foreign investors with the profit generated in China, is not required to make payment record filing.

How to conduct payment record filing

Taxpayers or withholding agents can choose to make payment record filing at tax authority in person or perform online filing.

Our Observations

In practice, some companies signed license or service contracts, but for certain reasons (not reaching license fee calculation threshold or no service provided etc.), no outbound payments are necessarily performed. Since there is no taxation record filing requirement upon the effectiveness of the contracts, such situation would usually not lead to compliance risk.

However, it is worth to note that for share transfer, contract registration shall be performed upon the conclusion of the share transfer contract and the registration at the Administration for Market Regulation (“AMR”) and tax filing obligation of the stamp duties should be fulfilled, regardless whether an outbound payment is required or not.

We strongly advise against circumventing the tax record filing obligation for cross-border payments by splitting the payment into multiple installments of less than USD 50,000. In practice, banks are very vigilant about such payment orders and may question the business substance of the payments. In addition, such behavior can have a negative impact on the taxpayer's creditworthiness in the SAFE system.

Furthermore, it shall be noted that a transaction does not require payment record filing (e.g. the transaction amount fall below USD 50,000 or fall within the scope which does not require payment record filing) does not mean that it is not subject to tax in China. Such tax evasion will also lead to late payment interest and even more severe consequence such as penalties during a tax audit.

Recommendations

The current tax legislation is targeted to efficiently monitor the tax collection on outbound payments while alleviate the workload and burden of taxpayers. We suggest that foreign invested companies engaging in cross-border transactions shall review the nature of the transaction and refer to the latest legislation and practice to make corresponding taxation record filing accordingly. If any changes are made to contracts that have been registered, it could be more efficient for taxpayers or withholding agents to update the contract registration online.

For certain transactions in particular under a main frame contract with various of transactions, taxpayers or withholding agents shall seek for professional advice from tax experts in order to self-assess and mitigate the tax risk. Under certain circumstances, it might be recommendable to make contract update or modification for tax optimization and efficiency purpose.