Purchase of shares in PRC resident company
Agreements to transfer shares in a PRC company are typically subject to PRC stamp duty at a rate of 0.05% of the consideration, which applies to both the purchaser and the seller.
PRC tax residence
A company is treated as tax resident in the PRC if it is incorporated in the PRC or if its place of effective management is situated in the PRC.
If a company is a resident of both the PRC and another state, its tax residency status should be determined based on the double tax treaty (DTT) concluded between the two states.
Under the PRC-Portugal DTT, if a company is a resident of both the PRC and Portugal, then it shall be deemed to be a resident of the state in which the place of effective management of its business is situated. However, when such a person has the place of effective management of its business in one of the states and the place of the head office of its business in the other state, then the competent authorities of the states shall determine by mutual agreement the state of which the person shall be deemed to be resident for the purpose of the DTT.
Corporate income tax rate
The current main rate of corporation income tax (CIT) in the PRC is 25%.
Equity financing from Portuguese resident parent company to PRC resident subsidiary
There are no PRC tax implications for an offshore company contributing cash into a PRC company for equity financing, except that the PRC company shall be subject to stamp duty at a rate of 0.025% on the newly added paid-in capital and capital reserve.
Withholding tax on dividend payments to Portuguese resident parent company
The company receiving dividends from the PRC resident company is generally subject to PRC withholding tax (WHT) at 10%.
The company receiving dividends may be entitled to enjoy a preferential WHT rate, subject to the conditions prescribed in certain DTT.
The PRC-Portugal DTT does not provide a preferential tax treatment for the Portuguese company receiving dividends from the PRC resident company, so the WHT on dividend payments is at 10%.
Debt financing from Portuguese resident parent company to PRC resident subsidiary – tax deductibility of interest payments
The PRC resident subsidiary is generally entitled to PRC corporation tax deductions for interest that it pays in respect of the loan from the offshore resident parent company.
However, the deductions of the interest expense may be denied or limited in the following circumstances.
- For interest expenses on borrowing from a non-financial institution by another non-financial institution, the portion that exceeds the amount calculated based on the interest rate for similar types of loans from financial enterprises in the same period is non-deductible.
- For interest paid to related parties, the tax deduction is subject to the thin capitalization rule (i.e. the tax deduction is limited in accordance with a debt-to-equity ratio of 2:1 for general enterprises and 5:1 for financial enterprises).
Debt financing from Portuguese resident parent company to PRC resident subsidiary – withholding tax on interest payments
Payments of PRC-source interest are generally subject to PRC WHT at 10%, unless the relevant DTT provides a preferential rate.
Under the DTTs between China and the states which are covered by this guide (i.e. the UK, the US, Switzerland, Spain, France, Germany, Portugal, Luxembourg, Belgium, Ireland, Italy), there is no preferential WHT rate provided for the foreign resident company receiving interest payments from a PRC resident company.
Intellectual property – withholding tax on royalties paid to Portuguese resident parent company
PRC WHT at 10% applies to royalty income acquired through granting rights to use patents, non-patent technology, trademarks, copyrights, etc.
The foreign resident company receiving royalties may be entitled to enjoy a preferential WHT rate, subject to the conditions prescribed in the relevant DTT.
The PRC-Portugal DTT does not provide a preferential tax treatment for the Portuguese company receiving royalties from China, so the WHT on royalty payments is at 10%.
Intellectual property – tax treatment of licence granted by Portuguese resident parent company to PRC resident company
PRC Value Added Tax (VAT), usually at a rate of 6%, may apply to an intellectual property licence granted to a PRC licensee.
Intellectual property – tax incentives
A reduced CIT rate of 15% is applicable for qualified High and New Technology Enterprises (HNTEs) and Technologically Advanced Service Companies.
A qualified resident enterprise can enjoy 100% super deduction of research and development (R&D) expenses for CIT purposes.
A VAT exemption is provided in relation to technology transfer and development and the related technical consulting and technical services.
Intra-group transactions – anti-avoidance rules including transfer pricing
Various PRC anti-avoidance rules may be relevant to intra-group transactions (in addition to the anti-avoidance rules mentioned above in relation to the tax deductibility of interest payments). These include:
- the transfer pricing rules, including the rules in relation to: - related-party transactions reporting; - contemporaneous documentation administration; - advance pricing arrangement administration; and - cost contribution agreement administration); and
- the general anti-avoidance rule (GAAR).
Sales tax/VAT
“Domestic taxable transactions” including selling goods, labour and other services, intangible assets and real property may be subject to PRC VAT.
Typically, a general taxpayer can offset the VAT it pays on received supplies (input tax) against the VAT imposed on its own supplies (output tax), paying or reclaiming the difference.
Certain supplies, such as supplies of technology transfer services, are exempt from VAT. Input tax is not deductible if the relevant supplies are used by the business to make exempt supplies.
The rates of VAT in the PRC vary depending on the nature of the supply. The current applicable rates of PRC VAT are 13%, 9%, 6%, and 0% (with the latter rate applying to cross-border taxable activities).
For small-scale taxpayers, simplified VAT collection at the rate of 3% is generally applicable, without offsetting the input tax.
Reduced rates may apply according to certain preferential policies.
As a landmark development of PRC tax legislation, on 25 December 2024 the Standing Committee of the 14th National People’s Congress of China voted to enact the Value-Added Tax Law of People’s Republic of China (the “VAT Law”), which will take effect on 1 January 2026.
The key changes from the VAT Law include amendments to:
- refine the definition of “domestic taxable transactions”. As a result, transactions that trigger VAT implications under the current effective VAT regime may be no longer subject to VAT when the VAT Law comes into force;
- replace “deemed sales” with “deemed taxable transactions” and narrow down the scope from 11 items to 4 items, to reduce the VAT burden as “deemed sales” are also subject to VAT but without any consideration;
- define new non-taxable transactions;
- update the scope of non-creditable input VAT; and
- clarify the applicable tax rate under the “simple tax method”.
As an overview, the VAT Law does not overturn the current VAT framework in the PRC, but it refines the VAT system and aims to create a more efficient, transparent and compliant VAT environment in the PRC.
Pillar Two
China joined the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy dated 8 October 2021, which was discussed in the OECD/G20 Inclusive Framework on BEPS.
China also approved the Outcome Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy dated 11 July 2023.
China has not yet released any official documents on Pillar Two from a PRC tax and legal perspective.
Use of tax losses
Generally, tax losses may be carried forward for five years starting from the year subsequent to the year in which the loss was incurred. The period of carrying forward the losses is extended to ten years for certain types of enterprises, such as HNTEs and small and medium-sized technology enterprises.
Surrendering losses within group
There is no rule in the PRC regarding surrendering losses within a group.
Payroll taxes relating to employing staff in the PRC
In general, the employees of a PRC resident company who work in the PRC will be subject to PRC individual income tax (IIT). The employer should act as a withholding agent of IIT. Income from wages and salaries is part of the comprehensive income, which is subject, in its entirety, to progressive rates of IIT of 3% to 45%.
Both the employees working in the PRC and their employers should participate in the Social Security Insurance (SSI) system. The employers are the withholding agents for the employees’ contributions. The SSI system is made up of five types of insurances, namely pension, medical, work-related injury, unemployment and maternity insurances. The contributions may be different in different cities. Foreign individuals working in China are required to participate in the SSI system.
Tax issues relating to secondees sent from Portugal to PRC resident company
In general, remuneration paid to a Portuguese resident individual in respect of an employment exercised in the PRC may be taxed in the PRC. However, the remuneration is instead generally taxable only in Portugal if:
- the secondee is present in the PRC for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned;
- the secondee’s remuneration is paid by, or on behalf of, an employer who is not a PRC resident; and
- the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the PRC.
The PRC’s tax authority at state level, State Taxation Administration, interprets the term ‘employer’ in this context to mean the person who has rights to and bears relevant responsibilities and risks of the labour results of the employee. Therefore the exemption may not apply when the PRC resident company using the secondee’s services bears the cost of the secondee’s salary.
Portugal does not have a reciprocal social security agreement with China and therefore the secondee’s earnings in the PRC will be subject to PRC SSI.
Tax on disposal of shares in PRC resident company
A non-resident enterprise transferring shares in a PRC resident company is generally subject to 10% PRC WHT.
An exemption from WHT on share disposal may be available, subject to the conditions prescribed in certain DTT.
Under the PRC-Portugal DTT, a Portuguese company may apply for a WHT exemption for share disposal if the property of the company of which the shares are transferred does not consist principally of immovable property situated in China.
Contacts
Bejing
Shanghai
© Eversheds Sutherland. All rights reserved. Eversheds Sutherland is a global provider of legal and other services operating through various separate and distinct legal entities. Eversheds Sutherland is the name and brand under which the members of Eversheds Sutherland Limited (Eversheds Sutherland (International) LLP and Eversheds Sutherland (US) LLP) and their respective controlled, managed and affiliated firms and the members of Eversheds Sutherland (Europe) Limited (each an "Eversheds Sutherland Entity" and together the "Eversheds Sutherland Entities") provide legal or other services to clients around the world. Eversheds Sutherland Entities are constituted and regulated in accordance with relevant local regulatory and legal requirements and operate in accordance with their locally registered names. The use of the name Eversheds Sutherland, is for description purposes only and does not imply that the Eversheds Sutherland Entities are in a partnership or are part of a global LLP. The responsibility for the provision of services to the client is defined in the terms of engagement between the instructed firm and the client.