Members are advised that following a Notice published on 30 June 2014 by the Chinese State Authority of Taxation (Notice No 37 on Provisional Measures on the Collection of Tax on Non-Resident Taxpayers Engaged in International Transportation Business), measures on the collection of tax from non-resident taxpayers engaged in international transportation business in China will take effect on 1 August 2014.
EIT is defined as a tax of about 20%-25% levied on the income earned as result of business operations within the Chinese territory. Non-resident companies have formally been subject to this tax for a number of years and the new measures are expected to serve purpose of enhancing implementation and tax compliance. Notably, a large number of countries have double tax treaties with China fully exempting foreign companies from tax obligation however the company must actively apply for an exemption.
The main features of the Chinese EIT can be summarized as follows:
Who are “non-resident taxpayers”
The tax obligation applies to all foreign companies carrying out international transportation business via vessels, aircraft or space slots (either owned or hired), which includes the transportation of passengers, cargo or post in and out of Chinese ports, together with other cargo-handling and warehousing activities. It includes voyage chartering and time chartering.
How to register EIT
Foreign companies are obliged to register with the local tax authority. It is possible to appoint a local agent to handle the tax registration.
What is “taxable income”?
Company income tax shall be deducted from the actual income received from the transportation services, less the relevant expense incurred. This includes freight earnings, such as ticket revenues, overweight baggage charges, insurance premiums, entertainment and so on for passenger carriage, as well as basic freight together with various surcharges for cargo carriage.
Tax Withholding Obligation
Chinese partners have an obligation to withhold tax in the event that the foreign company fails to register with the tax authority. The Club has previously assisted members in disputes under charterparties concerning deductions of EIT from charter hire and freight. Any non-resident owner (in China) who wish to protect herself against EIT should consider inserting clearly worded charterparty clauses which make it clear that charterers are liable to pay all taxes originating from China, even if under Chinese law, owners are deemed to be the tax payer. It may well be that owners should consider more watertight clauses than those usually found in standard charterparty forms.
Double tax treaties
Foreign companies are eligible to apply for an official confirmation from the Chinese tax authority through which they may benefit from reduced or waived EIT due to a double taxation treaty between their nation and China. A list of the counties having double tax treaties with China can be found in the document below.
Members are recommended to contact their advisors and also Chinese business partners in order to ascertain their exposure against Chinese EIT.
Chinese-double-tax-treaties.pdf
Member Alert is published by The Swedish Club as a service to members. While the information is believed correct, the Club cannot assume responsibility for completeness or accuracy.