The document summarizes new rules and guidance issued in China related to taxation. It discusses a circular that defers withholding tax on dividends paid to foreign investors if they are reinvested in China. It also summarizes new enterprise income tax return forms issued by the State Administration of Taxation and guidance clarifying value-added tax issues arising from VAT reforms. Finally, it discusses a public notice that provides further clarification on determining "beneficial ownership" in tax treaties.

1. Regulation
Cooperation
Interpretation
China tax
bulletin
Issue 2 April 2018
China tax bulletin 1
New Rules Issued on
Deferral of Withholding
Tax on Dividends Paid
to Foreign Investors and
Reinvested in China
On 28 December 2017, four Chinese ministries (Ministry of
Finance, State Administration of Taxation (SAT), National
Development, Reform Commission, and Ministry of Commerce)
jointly issued Circular on Policies on Temporary Exemption of
Withholding Tax (WHT) for Direct Investment with Distributed
Profits by Foreign Investors (Caishui [2017] No. 88, Circular
88), which defers the imposition of withholding tax on profits
distributed by Chinese enterprises to foreign investors. On 8
January 2018, the SAT issued Bulletin on the Implementation of
Policies on Temporary Exemption of WHT for Direct Investment
with Distributed Profits by Foreign Investors (Bulletin of the
State Administration of Taxation [2018] No. 3, Bulletin 3), which
contains the implementation guidance for Circular 88.
Circular 88 and Bulletin 3, which apply retroactively as from
1 January 2017, set out the conditions and procedures for
obtaining deferral and the effective date, as well as measures
outlining how the tax authorities will administer the incentive.

2. Preconditions to enjoy the tax deferral
treatment
Profit distributions received by foreign investors from PRC
resident enterprises in China that are directly reinvested in
encouraged investment projects in China will be eligible for a
deferral of the 10% withholding tax on the distributed profits,
given four conditions are fulfilled:
Direct equity investment:
• Increasing the paid-in capital or capital reserves of an
existing PRC resident enterprise in China by a new capital
injection or by transferring retained earnings to capital;
• Setting up a new PRC resident enterprise in China;
• Acquiring an equity interest in an existing PRC resident
enterprise in China from an unrelated party; and
• Other forms of investment as specified by the Ministry of
Finance or the SAT.
Unless to be considered as a strategic investment under the
Administrative Measures for Strategic Investments in Listed
Companies by Foreign Investors (Order of the Ministry of
Commerce [2005] No. 28), the following investments will not
qualify:
• investments in newly issued shares of listed companies;
• investments in shares converted from capital surplus or
retained earnings of listed companies; and
• acquisition of shares in listed companies.
Distributed profits
The profits distributed to the foreign investor refer to dividends
and profits distribution, etc. form equity investment distributed
by the PRC resident enterprise to its foreign investors from the
realized retained earnings.
Route of reinvestment:
The funds or non-cash assets for the reinvestment must be
transferred directly from the profit-distributing enterprise to
the invested enterprise or equity transferor.
Encouraged investment projects
• The reinvestment must be a direct investment in
encouraged investment projects listed in:
• the Catalogue for the Guidance of Foreign Investment
Industries; or
• the Catalogue of Priority Industries for Foreign Investment
in Central and Western China.
Procedures for application of tax deferral
To benefit from the tax deferral, the foreign investor, the Chinese
profit-distributing enterprise and the tax authorities in charge of
the profit-distributing enterprise must follow certain procedures:
Foreign investor
• The foreign investor must complete some part of the form,
"Information Reporting Form for Non-resident Enterprises
Deferring Withholding Tax" (WHT deferral form) and submit
the form to the profit- distributing enterprise.
• In terms of the evidence showing that the reinvestment
falls within the scope of the above catalogues during the
term of the reinvestment, the foreign investor must submit
the evidence to the tax authorities in charge of the profit-
distributing entity either before it exits the reinvestment or
when it actually pays the deferred tax.
Profit-distributing enterprise
• The profit-distributing enterprise must review the WHT
deferral form provided by the foreign investor
• The profit-distributing enterprise must complete the
relevant sections in the WHT deferral form that apply to it.
• The profit-distributing enterprise must submit the WHT
deferral form, as well as a completed enterprise income tax
withholding form (EIT withholding form) to the tax authorities
within seven days from the date the profits were distributed.
Tax authorities in charge of profit-distributing
enterprise
The tax authorities must send a "Liaison Letter on Tax Matters
Relating to Nonresident Enterprises" to the tax authorities
in charge of the invested enterprise or other relevant tax
authorities to notify them of the relevant information within
10 business days of receiving the WHT deferral form from the
profit-distributing enterprise.
The settlement of the deferred tax
The foreign investor exits from the reinvestment
• If a foreign investor exits from a reinvestment that has
benefited from the deferral of withholding tax, it will be
required to pay the deferred withholding tax within seven
days from the date it receives the relevant payment.
• If the foreign investor disposes an investment that has
partially enjoyed the withholding tax deferral benefit, the
foreign investor will be deemed to dispose the investment
that has enjoyed the tax deferral benefit first.

3. The tax authorities determine that a foreign
investor is no longer qualified
• If the situation is caused by the profit-distributing
enterprise, the tax authorities will hold that enterprise liable
for failure to withhold tax and then demand recovery of the
withholding tax from the foreign investor.
• If the situation is caused by the foreign investor, the foreign
investor will be deemed not to have filed and paid tax due,
and an overdue period for tax payment will be counted as
from the date of the profit distribution
GT observation
The tax deferral treatment is a very favorable policy to attract
foreign capital flow into China. Circular 88 and Bulletin 3
provide a relatively lenient policy for foreign investors to enjoy
tax deferral benefit on their dividends, sending a strong signal
that the Chinese government is committed to attracting and
retaining foreign investment in the country. Foreign investors
wishing to benefit from the tax deferral opportunity should
consider reviewing their investment plans and continue to
monitor future developments in this area. Foreign investors
that have generate profits from their investment activities in
China are suggested to proactively assess their existing group
investment strategy and adjust accordingly in order to fully
leverage on such treatment.
SAT Releases 2017
Enterprise Income Tax
Return Forms
On 5 January 2018, China’s State Administration of Taxation
(SAT) published Bulletin 54 regarding the 2017 version of the
Enterprise Income Tax (EIT) Return Forms, which replace the
old version issued in 2014. The new forms is valid for filing the
EIT returns of 2017 and thereafter.
The main changes are listed as follows:
1. Amendments to Forms of Donation Expenditure and
Certain Preferential Policies
2. Detailed Information Form on Tax Adjustments for
Donations (Form A105070): Two columns are added on
the new form: "Deductible donations brought forward from
previous years" (Column 2) and "Deductible donations
carried forward to future years" (Column 7).
3. Detailed Information Form on Super Deduction of
Research and Development (R&D) Expenses (Form
A107012): The new EIT form distinguishes between small
and medium-sized science and technology enterprises
(SMSTEs) and non-SMSTEs by adding a column for "basic
information” since the R&D super deduction rate for
SMSTEs was increased from 50% to 75% on 1 January 2017.
Moreover, the new EIT form classifies the R&D expenses
eligible for the super deduction into seven categories in
response to guidance on the R&D super deduction issued in
2015 (i.e., Caishui [2015] No. 119), and provide information
for certain items are required.
4. Detailed Information Form on Tax Incentives for High-
New Technology Enterprises (HNTEs) (Form A107041):
The new form is updated based on the Administrative
Measures of HNTE Recognition (HNTE Measures) revised in
2016:
• Revenue: Information on nontaxable revenue is required on
the new form.
• Personnel: Only the number of science and technology
personnel is required.
• R&D expenses: The new EIT form requires information of
R&D expenses of the previous two years, as well as the
ratio of R&D expenses to total sales computed based on
the aggregate amount in the most recent three years.
The new form adds a separate line for HNTEs that are
newly established in the five economic zones (i.e., Hainan,
Shantou, Shenzhen, Xiamen and Zhuhai) and Shanghai
Pudong as these HNTEs may enjoy two years’ EIT
exemption followed by three years of a 12.5% tax rate.
5. Detailed Information Form on Tax Incentives for
Software and Integrated Circuit (IC) Enterprises (Form
A107042): The code of software/IC enterprise certificate is
no longer required.
Meanwhile, the form streamlines the structure of revenue
information (Line 23 to 31), and no longer differentiates
between enterprises established before and after 1 January
2011.

4. 6. Elimination of four forms
• Detailed Information Form for Fixed Asset Accelerated
Depreciation (Form A105081);
• Detailed Information Form for Asset Loss (Special Report)
Deductions and Relevant Tax Adjustments (Form A105091);
• Detailed Information Form for Tax Incentives on Revenue
Derived from Products through Comprehensive Utilization
of Resources (Form A107012); and
• Detailed Information Form for Tax Incentives on Agriculture-
Related Interest Income and Insurance Premiums Earned
by Financial and Insurance Institutions (Form A107013).
Government Issues More
Guidance Clarifying Issues
Arising from VAT Reform
On 25 December 2017, China’s Ministry of Finance (MOF)
together with the State Administration of Taxation (SAT) issued
guidance (Circular 90) on issues arising from the country’s
VAT reform, which is valid from 1 January, 2018. The circular
provides new rules on input VAT credits and VAT exemptions, and
clarification on certain controversial VAT issues for industries
such as financial services and transportation services.
For general VAT taxpayers
• For leasing expenses of fixed assets and real property, the
input VAT is fully creditable if the assets or property are
used for taxable items subject to both the general taxing
method and the simplified taxing method, or VAT exemption,
or for collective welfare and personal consumption
purposes.
• For road tolls, the creditable input VAT will be the amount
of the relevant VAT general e- invoices. If VAT general
e-invoices are not available, calculation of input VAT based
on toll invoices can be used as the creditable input VAT for
expressway tolls for the six-month period from 1 January
2018 to 30 June 2018, and for first-class and second-class
highway tolls for calendar year 2018.
Financial services
Asset management products
• For loan services, the taxable sales amount will be the
interest income and income of a similar nature generated
as from 1 January 2018.
• For transfers of stock (excluding restricted stock), bonds,
funds and non-commodity futures purchased before
31 December 2017, the taxable sales amount may be
calculated based on one of the following purchase prices:
a) Actual purchase price; or
b) Price/value on the last trading day of 2017: stock closing
price, bond valuation price, net value of the fund-share
and settlement price of non-commodity futures.
Guarantee income
The VAT exemption for guarantee and re-guarantee services is
temporarily expanded to include income from the provision of
guarantees and re-guarantees for farmers, small enterprises,
micro enterprises and businesses operated by individuals (i.e.
"individual industrial and commercial households"). If the re-
guarantee contract covers more than one original guarantee
contact, all the original guarantee contracts must be VAT exempt;
otherwise, it is not eligible for a VAT exemption. The above
treatment is valid from 1 January 2018 to 31 December 2019.
Transportation services
Income from tickets that have been sold but not used is
subject to VAT under the category “transportation services”.
Income from refunded tickets (e.g., refund fees and service
fees) is subject to VAT under the category “other modern
services”.
Brokerage and agency services
Air transportation brokerage enterprises providing overseas
tickets brokerage services must calculate output VAT based on
the net income from such services. Valid vouchers to support a
deduction from income include invoices or schedules provided
by domestic enterprises, and signed receipts provided by
foreign enterprises or confirmation provided by foreign
notaries.
GT observation
The government has issued a series of documents that provide
guidance on issues arising from the reform process since the
VAT reform was rolled out nationwide to all sectors, with the
aim to ensure that the reform can be carried out smoothly.
Circular 90 clarifies the treatment of input VAT credits
for the lease of fixed assets and real property, addresses
controversial issues arising from VAT practices in different
industries and expands the applicable range or period for
specific VAT exemption policies. Therefore, it should provide

5. additional benefits for enterprises affected by the VAT reform
and further relieve the burdens on taxpayers. Taxpayers
should monitor the issuance of future guidance and update
their tax practices accordingly.
State Administration of
Taxation Further Clear
the Determination of
“Beneficial Owner”
On 6 February 2018, SAT issued Public Notice on Clarification
of Beneficial Ownership in DTAs (SAT Public Notice [2018]
No. 9, Public Notice 9) and SAT Interpretative Guidance on
Public Notice 9 (interpretative guidance) This refines the
interpretation of the beneficial ownership requirement in the
dividends, interest and royalty articles of Chinese double tax
agreements (DTAs) and takes effect from April 2018.
Public Notice 9 retains the commercial substance-focused
approach to beneficial ownership, which is originally set out in
Circular 601 in 2009. At the same time, it provides much more
clarity on the substance requirements, expands the ‘safe harbor’,
and introduces a form of ‘derivative benefits’ test. The changes
should be of assistance to multinational enterprises (MNEs).
Public Notice 9 background and main
changes
With Public Notice 9, the SAT has now eventually decided
to stay with a commercial substance driven concept of
beneficial ownership. This being said, a number of aspects of
the new guidance may help to improve access to DTA relief:
• The SAT interpretative guidance accompanying Public
Notice 9 sets out numerous detailed examples, which give
a much better sense of the level of commercial substance
that the SAT considers acceptable.
• Under Public Notice 30 (2012), a ‘safe harbor’ means listed
foreign companies, and their local subsidiaries tax resident
in the same jurisdiction, would not need to satisfy the
‘negative factor’ analysis to qualify as beneficial owners.
Public Notice 9 now extends this to companies, held 100%
by individuals resident in, and government bodies of,
the company’s jurisdiction. Intermediate entities must be
located in the company’s jurisdiction or in China.
• There is now a type of 'derivative benefits' test, under which
regard can be had to the 100% direct and indirect parents
of a DTA relief claimant company, in making the beneficial
ownership assessment for dividends. If the parent company
is either tax resident in the same jurisdiction as the DTA
relief claimant, or in a jurisdiction whose DTA with China
offers equivalent benefits, and it passes the ‘negative
factors’ test, then DTA relief will be available to the DTA
relief claimant. Intermediate entities must be located in
jurisdictions with equivalent China DTA benefits.
GT observation
Overall speaking, the issuance of Public Notice 9 will
bring positive impacts to those non-resident companies
who receive income such as dividend, interest and royalty
from China since Public Notice 9 provides more detailed
guidance on several uncertain points while also relaxing some
determination standards for enjoying treaty benefits. Whilst,
in the meantime, Public Notice 9 also imposes more detailed
and clearer standards for determination of BO, which will
bring more challenges for those relevant corporations.
According to the prevailing regulations for outbound remittance,
when a Chinese entity needs to pay dividend, interest or royalty
to an overseas entity, the Chinese payer entity should conduct
record filing with its in-charge tax authority and assess the
applicability of treaty benefits by itself. However, from practical
perspective, we noted that still some tax authorities request
the formal review and approval of treaty benefits as the pre-
step during outbound remittance. Especially under post-
administration, Public Notice 9 will cause more uncertainty
for enterprises when doing self-assessment of applicability of
treaty benefits, and also more challenges for ensuring the tax
compliance level while also strive for the tax efficiency.
Thus, we would suggest the followings:
• By further analysis of the new rule, review and assess the
current group structure and function / risk allocation, so as
to evaluate the benefits and also challenges brought from
the new rule;
• Make proper adjustments / amendments to the current
arrangement within group, so as to ensure the applicability
of benefits; and
• Timely prepare and maintain the relevant supporting
documents (e.g. article of association, financial statements,
board meeting minutes, relevant documentation with
regards to the function and risk allocation), so as to get
prepared for any possible queries from the tax authority.

6. China tax bulletin
China tax bulletin are issued in summary form exclusively for information of
clients and staff of Grant Thornton and should not be used or relied upon
as a substitute for detailed professional advice. Accordingly Grant Thornton
accepts no responsibility for any loss that occurs to any party who acts on
the information contained herein without further consultation with us.
Contact Information
China Tax Technical Centre
CNTTC@cn.gt.com
Beijing
Wilfred Chiu
Partner
T +86 10 8566 5828
M +86 139 0118 6670
E wilfred.chiu@cn.gt.com
Julie Zhang
Partner
T +86 10 8566 5777
M +86 135 0138 6998
E julie.zhang@cn.gt.com
Shanghai
Rose Zhou
Partner
T +86 21 2322 0298
M +86 136 1186 2116
E rose.zhou@cn.gt.com
Sally Xu
Partner
T +86 21 2322 0224
M +86 136 4171 0307
E sally.xu@cn.gt.com
www.grantthornton.cn
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