By Dezan Shira & Associates
A tax residency certificate is crucial for multinational companies when applying for tax benefits under international tax treaties, or when a foreign company wants to prove that a subsidiary is compliant with China’s taxation laws.
When a foreign business or individual makes income in China, it may be subject to tax in both the business or individual’s home country and China, which could substantially increase their tax burden. Many investors therefore choose to set up an offshore share company in locations that have double taxation avoidance agreements (DTAs) in place with China, such as the United States, in order to enjoy reduced tax rates. However, the process of applying for DTA benefits was extremely complicated and tedious.
The Certificate of Tax Residency, a legal document issued by the tax bureau stating that a foreign company or employee is in tax compliance, applies to foreign nationals employed in China and foreign companies operating as subsidiaries. The certificate is extremely useful when it comes to having a home, income or residence in another country and was created as a simpler alternative to DTAs.
This certificate serves as a legal proof that a foreign national is a qualified Chinese Tax Resident and has individual income tax withheld by his employer. It also provides relevant authentication for his native country.
Expat Employee Applications
Chinese taxation has its own rules that are more or less contingent on time spent in China, sourced income location, taxpayer status, and applicable DTAs. Specifically, foreign individuals seeking the Chinese tax residency certificate must have resided in China for at least one year. Find out more about the various taxation parameters here.
Obtaining this certificate is not an automatic method of avoiding taxation requirements in a foreign individual’s native country. Foreign employees should consult their respective tax authorities on the effects of the Certificate of Tax Residency.
In order to apply for the certificate, the local tax bureau requires an individual to provide:
- an application form;
- copy and original passport;
- copy of tax registration certificate of employer;
- the original PRC individual income tax and other tax payment receipts (if no tax payment is provided a written explanation letter is required);
- supporting documents for PRC residence days; and, sometimes,
- other supporting documents required by the tax authority in charge
Foreign subsidiaries must provide these documents to the local tax bureau:
- an application form;
- copy and the original tax registration certificate; and
- tax clearance certificate for the current fiscal year (if no tax payment is provided a written explanation letter is required)
Remember that the application procedure might be different in practice and that the time required for issuing the certificate can vary by region and tax authority. For example, in Shanghai, tax authorities can issue the certificate in five business days, while in Shandong province the process can take about 20 business days.
About the author: This article was first published on China Briefing. Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.For inquiries, please email us at [email protected] Further information about our firm can be found at: www.dezshira.com