Tax on corporate lending and bond issues in China: overview

A Q&A guide to tax on corporate lending and bond issues in China.

This Q&A provides a high level overview of finance tax in China and focuses on corporate lending and borrowing (including withholding tax requirements), bond issues, plant and machinery leasing, taxation of the borrower and lender when restructuring debt, and securitisations.

To compare answers across multiple jurisdictions, visit the Tax on corporate lending and bond issues Country Q&A tool.

The Q&A is part of the Multi-jurisdictional Guide to Tax on Transactions. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-mjg.

Tony Dong and Alice Zhang, King & Wood Mallesons
Contents

Tax authorities

1. What are the main authorities responsible for enforcing taxes on finance transactions in your jurisdiction?

The State Administration of Taxation (SAT) is the highest tax authority in People's Republic of China (China), which interprets tax laws and regulations by issuing Circulars, Notices, Replies and Rulings, and provides guidance on, and approves special tax treatment for, specific transactions. The SAT normally does not deal with taxpayers directly.

China has a dual tax system for tax enforcement, that is:

  • A parallel structure of state tax authority and local tax authority is in place on each local administrative level, including province, municipality, city, county, and so on.

  • The two tax authorities are responsible for the administration and collection of different types of taxes on finance transactions.

 

Pre-completion tax clearances

2. Is it possible or necessary to apply for tax clearances from the tax authorities before completing a finance transaction?

Circumstances for obtaining clearance

There are no explicit laws or regulations providing formal procedures for applications for tax clearances or guidance from the tax authorities before completing a finance transaction.

In practice, it is difficult to obtain a formal tax clearance document from the tax authority before a finance transaction takes place. It is usually possible to consult with the relevant tax authority responsible for guidance on the tax treatment of a specific transaction. However, the feedback received from tax authority is not usually provided in writing and is not legally binding on that tax authority.

Mandatory or optional clearance?

As a matter of procedure concerning foreign exchange control in China, a tax clearance certificate is required for the remittance of non-trade payment exceeding US$30,000 to overseas recipients. Other than this, there are no further mandatory tax clearances that must be obtained.

Procedure for obtaining clearance

There is no formal procedure available to obtain guidance from the relevant tax authority on a particular finance transaction. In practical terms, a party may consult with the relevant authority anonymously or by disclosing the party's name to obtain the tax authority's viewpoint, but the tax authority's opinion is not legally binding.

 

Disclosure of finance transactions

3. Is it necessary to disclose the existence of any finance transactions to the tax authorities?

Circumstances where disclosure is required

Where a particular finance transaction is subject to taxes in China, the tax authority can require the taxpayer to provide relevant documents and information regarding the finance transaction concerned.

Manner and timing of disclosure

There are no explicit laws or regulations addressing the manner or timing of disclosure. In practice, when the taxpayer pays the relevant taxes in connection with the finance transaction, the tax authority can request that the taxpayer submit relevant documents and materials which relate to the finance transaction.

 

Taxes on corporate lending/borrowing

Taxes potentially chargeable on amounts receivable

4. What are the main corporate taxes potentially chargeable on interest and other amounts receivable under a loan?

Enterprise income tax

Key characteristics. The interest and other amounts receivable under the loan generally will be characterised as interest income in China.

Calculation of tax. The tax calculation on interest income depends on the status of the taxpayer (that is, the recipient of interest income). Tax is charged at the following rates:

  • If the taxpayer is a Chinese resident enterprise, its interest income is consolidated into its taxable income and the taxable income is then subject to enterprise income tax (the statutory enterprise income tax rate is 25%).

  • If the taxpayer is a Chinese individual, they are subject to individual income tax at a rate of 20%.

  • If the taxpayer is a non-Chinese resident enterprise without an establishment (or a permanent establishment under the context of the relevant double taxation treaty) in China, its interest income paid by a Chinese resident is subject to withholding tax. The standard withholding tax rate is 10% (which can be either reduced or exempted where a double taxation treaty applies).

  • If the taxpayer is a non-Chinese resident enterprise which has an establishment (or a permanent establishment under the context of the relevant double taxation treaty) in China, the tax treatment depends on whether the interest income is effectively connected with that establishment (or a permanent establishment under the context of the relevant double taxation treaty):

    • where the interest income is effectively connected with the establishment (or permanent establishment), the interest income is consolidated into the establishment's (or permanent establishment's) taxable income and is subject to enterprise income tax at a rate of 25%;

    • where the interest income is not effectively connected with the establishment (or permanent establishment) in China, its interest income paid by the Chinese resident is subject to withholding tax at a rate of 10% (which can be either reduced or exempted where a double taxation treaty applies).

  • If the taxpayer is a non-Chinese resident individual, they are subject to individual income tax at a rate of 20% on the interest income paid by a Chinese resident (which can be either reduced or exempted where a double taxation treaty applies). The individual income tax must be withheld for the interest paid by a PRC tax resident to a non-Chinese resident individual.

In addition to enterprise income tax, the recipient of interest income is subject to business tax at a rate of 5% on gross interest income, provided that either the lender or the borrower is a PRC tax resident (see below, Business tax). Further, local levies (such as educational surcharges, urban construction and maintenance surcharges) at the combined rate of between 10% to 13% will be imposed on the amount of business tax payable (see below, Local levies).

Triggering event. The tax is triggered when the interest is paid or is due in accordance with the relevant loan agreement.

Applicable rate (s). The rates vary depending on the status of the taxpayer (see above, Enterprise income tax: Calculation of tax).

Business tax

Key characteristics. The interest and other amounts receivable under the loan are generally characterised as interest income in China.

Calculation of tax. Business tax is calculated on the gross amount of interest income received by the taxpayer.

Triggering event. The tax is triggered when the interest is paid or is due in accordance with the relevant loan agreement.

Applicable rate(s). Business tax is charged at a rate of 5% on the gross amount of interest income.

Local levies

Key characteristics. Local levies (for example, educational surcharges, urban construction and maintenance surcharges) are imposed on the amount of business tax payable (see above, Business tax).

Calculation of tax. Local levies are calculated based on the amount of business tax payable (see above, Business tax).

Triggering event. Local levies are charged on the payment of the business tax (see above, Business tax).

Applicable rate(s). The rates charged for local levies vary from district to district. Generally, local levies include:

  • Educational surcharges at a rate of 3%.

  • Urban construction and maintenance surcharges at a rate of 7%.

  • Local education surcharges at a rate of 2%.

Stamp duty

Key characteristics. Stamp duty is imposed on a loan agreement that is either executed or implemented in China.

Calculation of tax. Each party to the loan agreement is subject to stamp duty at a rate of 0.005% of the loan principal.

Triggering event. Stamp duty is charged:

  • On execution of the loan agreement, where it is executed in China.

  • On implementation of the loan agreement in China, where it is executed outside of China.

Applicable rate (s). Stamp duty is charged at a rate of 0.005% of the loan principal.

 

Tax reliefs available for borrowing costs

5. What corporate tax reliefs are available for borrowing costs (including interest and other amounts payable under a loan)?

Pre-income tax deduction for certain borrowing costs

Key characteristics. Reasonable borrowing costs that are incurred by a Chinese resident enterprise in the ordinary course of business operations (which do not require capitalisation) can be deducted when calculating the amount of tax payable.

Where an enterprise borrows funds in the course of acquiring or constructing fixed assets, intangible assets or inventories whose construction takes longer than 12 months to reach the expected saleable condition, reasonable borrowing costs arising from that borrowing must be capitalised.

Calculation of relief. The reasonable borrowing costs incurred can be deducted from the Chinese resident enterprise's taxable income.

Triggering event. The deduction can be used when the borrowing costs are incurred.

Applicable rate(s). The reasonable borrowing costs can be deducted from the Chinese resident enterprise's taxable income (statutory enterprise tax is charged at a rate of 25% in China).

 

Tax payable on the transfer of debt

6. What corporate, transfer, stamp or other taxes are payable on the transfer of a debt under a loan?

Enterprise income tax

Key characteristics. If the debt is transferred at a discount where the debtor (that is, a Chinese resident enterprise) will recognise the forgiven debt income, that forgiven debt income is consolidated into the debtor's taxable income and will be subject to enterprise income tax.

Calculation of tax. Forgiven debt income is consolidated into the debtor's taxable income, and the taxable income is subject to enterprise income tax.

Triggering event. The recognition of forgiven debt income will trigger that income's liability to enterprise income tax.

Liable party/parties. The debtor recognising the forgiven debt income is liable to pay enterprise income tax on that forgiven debt income.

Applicable rate(s). The statutory enterprise income tax rate is 25% (which can be reduced depending on the taxpayer's tax status).

 

Withholding tax

7. Is there withholding tax on interest or any other payments under a loan?

When withholding tax applies

Withholding tax can apply when the taxpayer is a non-Chinese resident enterprise (see Question 4, Enterprise income tax: Calculation of tax).

Applicable rate(s) of withholding tax

Standard withholding tax is charged at a rate of 10% if the taxpayer is a foreign enterprise; while standard withholding tax is 20% if the taxpayer is a foreign individual.

Exemptions from withholding tax

Withholding tax can be either reduced or exempted under an applicable double taxation treaty (for example, interest from certain treasury bonds can be exempt from withholding tax).

For a comparative summary of withholding tax on interest, see table, Withholding tax requirement on interest on corporate debt, and the key exemptions ( www.practicallaw.com/3-502-0416) , in this multi-jurisdictional guide.

 

Guarantees

8. Do any particular tax issues arise on the provision of a guarantee?

Guarantee fees paid to a guarantor are characterised as an interest payment and are therefore subject to the same tax treatment as interest income (see Question 4, Enterprise income tax).

 

Bond issues

9. For corporate taxation purposes, are bonds treated any differently from standard corporate loans?

Bonds are not treated differently from standard corporate loans in China.

 

Taxes payable on the issue and/or transfer of a bond

10. What stamp, transfer or similar taxes are payable on the issue and/or transfer of a bond?

Enterprise income tax

Key characteristics. The transferor's gain or loss from the transfer of a bond is consolidated into its taxable income and the taxable income is subject to enterprise income tax (see Question 4, Enterprise income tax).

Calculation of tax. The gain or loss from the transfer forms part of the transferor's taxable income and is subject to enterprise income tax.

Triggering event. The creation of a gain or loss from the transfer triggers the tax consequence.

Liable party/parties. The transferor is liable to consolidate the gain or loss from the transfer into their taxable income.

Applicable rate(s). The standard rate for enterprise income tax is 25% (which can be reduced depending on the taxpayer's status).

Business tax

Key characteristics. Bond may be regarded as a type of financial instrument, and therefore, the income from trading financial instruments will be subject to business tax at a rate of 5%.

Calculation of tax. Business tax is calculated on the gain from the transfer of bond.

Triggering event. The creation of a gain from the transfer triggers the tax consequence.

Liable party/parties. The transferor is liable for business tax.

Applicable rate(s). The applicable business tax rate is 5%.

Local levies

Key characteristics. Local levies (for example, educational surcharges, urban construction and maintenance surcharges) are imposed on the amount of business tax payable (see above, Business tax).

Calculation of tax. Local levies are calculated based on the amount of business tax payable (see above, Business tax).

Triggering event. Local levies are charged on the payment of the business tax (see above, Business tax).

Applicable rate(s). The rates charged for local levies vary from district to district. Generally local levies include:

  • Educational surcharges at a rate of 3%.

  • Urban construction and maintenance surcharges at a rate of 7%.

  • Local education surcharges at a rate of 2%.

 

Exemptions

11. Are any exemptions available?

Interest from treasury bonds is exempt from enterprise income tax and individual income tax. Certain reductions or exemptions can also be available under an applicable double taxation treaty.

Business tax on gain from transfer of bond would be exempt if the transferor is an individual rather than an entity.

 

Plant and machinery leasing

Claiming capital allowances/tax depreciation

12. What are the basic rules for enabling the lessor or lessee of plant and machinery to claim capital allowances/tax depreciation?

Under an operating lease arrangement, the lessor can claim tax depreciation for the fixed assets (for example, plant and machinery).

Under a finance lease arrangement, the lessees can claim tax depreciation for the fixed assets (for example, plant and machinery).

The tax depreciation with regard to an operating lease arrangement and a finance lease arrangement must follow the general tax depreciation rules, which are set out in the China Enterprise Income Tax Law and its detailed implementing rules (see Question 13).

 

Rate of capital allowances/tax depreciation

13. What is the rate of capital allowances/tax depreciation; does it depend on the type of assets?

Capital allowance and tax depreciation generally applies the straight-line method. Depending on the types of assets, the minimum depreciable years are set out by the relevant tax laws in China. In applying the straight-line method for the tax depreciation in terms of fixed assets and biological assets, the residual value of the depreciable assets must be reasonably estimated and determined. There is no statutory requirement as to the rate of the residual value, though once the residual value is determined by the taxpayer it cannot be changed.

Under the China Enterprise Income Tax Law and its Implementing Rules, the rules regarding minimum depreciable/amortisable years are as follows:

  • Buildings: 20 years.

  • Aircraft, trains, vessels, machinery and other equipment: ten years.

  • Tools, furniture, and so on: five years.

  • Other transportation vehicles other than aircraft, trains and vessels: four years.

  • Electronic equipment: three years.

  • Forestry biological assets: ten years.

  • Livestock biological assets: three years.

  • Intangible assets: ten years.

 

Lessees not carrying on business in the jurisdiction

14. Are there special rules for leasing to lessees that do not carry on business in your jurisdiction?

There are no special rules that apply for leasing to lessees that do not carry on business in China.

 

Taxation of rentals

15. How are rentals taxed?

Rentals are subject to:

  • Enterprise income tax (same as interest income, (see Question 4, Enterprise income tax).

  • Value-added tax (VAT).

    Key characteristics. China is undertaking the VAT reform (VAT Reform) whereby certain types of income (such as rental income) which used to pay business tax are now subject to VAT. As such, under the VAT Reform which will take effect nationwide starting from 1 August 2013, the rental income will be subject to VAT instead of business tax.

    Calculation of tax. Under the VAT regime, the taxpayer is classified into general taxpayer and small-scale taxpayer. For the general taxpayer, the VAT is assessed based on the credit mechanism where the input VAT may be credited against the output VAT for the purpose of computing the VAT payable in a taxable period. For the small-scale taxpayer, VAT is computed based on the rental income (exclusive of VAT), and no credit mechanism is available.

    Triggering event. The tax is triggered when the rental income is paid or is due in accordance with the relevant lease agreement.

    Liable party/parties. The lessor will pay VAT.

    Applicable rate(s). The applicable VAT rate is different depending on the status of the taxpayer. For the general taxpayer, the VAT rate is 6% and the tax assessment adopts the credit mechanism as stated above, while for the small-scale taxpayer, the VAT rate is 3%.

  • Local levies.

    Key characteristics. Local levies (for example, educational surcharges, urban construction and maintenance surcharges) are imposed on the amount of VAT payable (see above, VAT).

    Calculation of tax. Local levies are calculated based on the amount of VAT payable (see above, VAT).

    Triggering event. Local levies are charged on the amount of VAT payable (see above, VAT).

    Applicable rate(s). The rates charged for local levies vary from district to district. Generally local levies include:

    • educational surcharges at a rate of 3%;

    • urban construction and maintenance surcharges at a rate of 7%;

    • local education surcharges at a rate of 2%.

  • Stamp duty is also payable on rentals (and is charged at a rate of 0.1% on the rental value for each party to the rental).

 

Rulings and clearances

16. Is a ruling or clearance necessary or common?

It is not necessary to obtain a ruling or clearance.

However, when a Chinese party remits a payment offshore and the payment exceeds US$30,000, a tax clearance or exemption certificate issued by the relevant tax authorities will be required for submission to the bank that is processing the remittance.

 

Restructuring debt

Unpaid or deferred interest or capital

17. What is the tax treatment of the borrower and the lender if interest or capital is unpaid or deferred?

Under the Implementing Regulations for the Enterprise Income Tax Law, the lender must recognise interest income on the date on which the interest becomes payable under the loan agreement. As a result, even if the borrower delays in making the interest payment, the lender must still recognise interest income in accordance with the payment date stipulated under the loan agreement. If the borrower defaults on the interest payment for more than three years and it can be proved that the borrower is unable to repay the interest, the lender can claim a deduction of bad debt, subject to the approval of the relevant tax authority.

 

Debt write-off/release and debt for equity swap

18. What is the tax treatment of the borrower and lender if a loan is:

The lender can claim a deduction of bad debt if the borrower has not paid the interest over a three-year period and it can be proven that the borrower cannot repay the interest. The claim for a bad debt deduction must be approved by the lender's relevant tax authority.

A debt for equity swap is subject to the approval of the relevant company registration authority. From a tax perspective, in order to calculate the gain/loss that results from the debt repayment, a debt for equity swap arrangement is regarded as two transactions:

  • One transaction for the repayment of the debt.

  • One transaction for the equity investment.

However, where a debt for equity swap fulfils the relevant conditions to qualify as a "special reorganisation" (as specified by Circular Caishui [2009] No. 59), the tax basis of the equity investment will be determined on the basis of the original book value of the debts, so that no gain/loss is realised in the debt restructuring.

The following conditions must be fulfilled for a debt for equity swap to qualify as a special reorganisation:

  • There must be a reasonable commercial reason for the arrangement, and the main objective of the arrangement must not be to reduce, avoid or defer tax payment.

  • The debtor's substantive business activities must not be changed within 12 months after the debt restructuring.

  • The creditor must not transfer the equity interest acquired from the debt restructuring within 12 months following the transaction.

 

Securitisation

19. Briefly explain the key features of the tax regime applicable to securitisations, including details of any specific tax rules that apply or issues that arise in relation to securitisations.

Securitisations are subject to the general tax rules in China and there are no specific rules which only apply to securitisations.

 

Foreign Account Tax Compliance Act (FATCA)

20. Has your jurisdiction entered into an intergovernmental agreement (IGA) to implement FATCA, or do you intend to enter into an IGA to implement FATCA?

There is no answer content for this Question, as it is a new addition to the template that did not exist at the time of writing.

 
21. Have there been any particular difficulties in light of your jurisdiction's domestic legislation with implementing the FATCA requirements?

There is no answer content for this Question, as it is a new addition to the template that did not exist at the time of writing.

 
22. Are there any provisions of your jurisdiction's IGA and/or domestic implementing legislation, if any, that are more onerous than the US FATCA requirements?

There is no answer content for this Question, as it is a new addition to the template that did not exist at the time of writing.

 

Bank levies

23. Are there any bank levies or similar taxes imposed specifically on financial institutions?

There is no answer content for this Question, as it is a new addition to the template that did not exist at the time of writing.

 
24. On what are any such levies or taxes charged?

There is no answer content for this Question, as it is a new addition to the template that did not exist at the time of writing.

 
25. At what rate(s) are the levies or taxes charged?

There is no answer content for this Question, as it is a new addition to the template that did not exist at the time of writing.

 
26. Are there any thresholds or exemptions?

There is no answer content for this Question, as it is a new addition to the template that did not exist at the time of writing.

 

Reform

27. Please summarise any proposals for reform that will impact on the taxation of finance transactions described above.

Ever since 2012, China has been undertaking the pilot VAT Reform where business tax would be gradually replaced by VAT. Initially, the pilot VAT Reform has been implemented on the trial basis in the selected ten provinces and municipalities. Starting from 1 August 2013, the pilot VAT Reform will be implemented nationwide. Under the pilot VAT Reform, the rent received from the rental of movable tangible property which used to pay business tax will be taxed under the VAT regime.

 

Online resources

PRC State Administration of Taxation

W www.chinatax.gov.cn/

Description. This is the official website for PRC State Administration of Taxation. The website covers the main tax laws and regulations of PRC. The English translation is not available in official websites. But for the unofficial English translation of some main law and regulation, they may be referred to in the public unofficial website.

Law Library

W www.law-lib.com/

Description. Law Library is an unofficial website which is open to the public. In Law Library, the main laws and regulations of PRC, as well as their unofficial English translations, could be searched and found.

 

Withholding tax requirement on interest on corporate debt, and the key exemptions

Jurisdiction

What is the withholding tax requirement on interest on corporate debt?

What are the key exemptions (ignoring double tax treaties)?

What is the rate?

People’s Republic of China

A non-PRC tax resident will generally be subject to withholding tax on receipt of interest on corporate debt.

Not available.

The standard withholding tax rate is 10% if the taxpayer is a foreign enterprise; whereas if the taxpayer is a foreign individual, the standard withholding tax rate is 20%.

 

Contributor details

Tony Dong

King & Wood Mallesons

T +86 10 5878 5118
F +86 10 5878 5599
E tony.dong@cn.kwm.com
W www.kwm.com

Qualified. China, Attorney at Law, 2010; Certified Tax Agent, 2004

Areas of practice. Tax.

Recent transactions

  • Represented a well known European chemistry company in the negotiation and settlement of a high profile transfer pricing audit, achieving tax savings for more than RMB10 million.
  • Provided tax planning for M&A transactions and private equity investments.
  • Advised domestic companies in devising investment structure for outbound investment in Europe and Australia.
  • Assisted clients in negotiation with the tax authorities for tax crime assessment.

Alice Zhang

King & Wood Mallesons

T +86 10 5878 5118
F +86 10 5878 5599
E zhangci@cn.kwm.com
W www.kwm.com

Qualified. China, Attorney at Law, 2012; New York, US, 2010

Areas of practice. Tax.

Recent transactions

  • Advised QFIIs on the tax implications for investment in China.
  • Provided tax structuring advice for inbound and outbound investment.

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