China's new 5% business tax on foreign service providers

Reply
  1. #1

    Join Date
    Jul 2008
    Posts
    28

    China's new 5% business tax on foreign service providers

    Hi -

    Apologies if my initial forum search was too cursory to find an existing thread on this topic.

    I have a registered partnership in HK and am planning to undertake a freelance contract with a mainland company. My service fee will now be subject to a 5% business tax by the Chinese tax authorities. The mainland company has agreed to compensate me for this tax, but I am confused as to the actual mechanics of paying the tax.

    Some legal advice I've found on the web suggests that I can ask for a contract provision that ensures I am paid net of taxes, and that the mainland company is responsible for tax compliance. Other info suggests that, as I don't have a rep in the PRC, the mainland company automatically becomes my withholding agent anyway. I don't understand exactly what this means, however, and was wondering if anyone has had any experiences with this new tax.

    Finally, what are the HK tax implications? i.e. do I pay 15% of the gross service fee or the service fee after Chinese tax - and is there a way I can structure the contract to achieve the latter?

    Sorry, it's a long one! Many thanks,
    O


  2. #2

    Join Date
    Apr 2004
    Location
    hong kong
    Posts
    3,487

    On the HK tax issue, if the work is undertaken in China and your fee paid from China then it is tax exempt. If work was done in HK and invoiced from HK then you are liable for tax.

    I think CEPA covers a lot of this and looking it up on the HKTDC site may help.


  3. #3

    Join Date
    Jun 2005
    Location
    Hong Kong
    Posts
    23,221

    I can't answer the Chinese question, but on the HK question as a business you pay tax on your profits, not on your revenue, so that would be net of any unrecoverable foreign taxes and of all your expenses in carrying on your business.


  4. #4

    Join Date
    Jul 2008
    Posts
    28

    Thanks! Yes, "profits tax", I guess the clue is in the title


  5. #5

    Join Date
    Apr 2004
    Location
    hong kong
    Posts
    3,487

    Seems a bit of a rip off with the exception of the registered capital.

    When I built my factory in 2006 any HK reg company doing a JV would get Zero income tax, Zero Business Tax, Zero Property Tax, VAT refund at preferential rates + other goodies. The Reg capital was 100K BUT no one really pushed you on that prior to getting the JV certificate,"Some people " where known to recycle payments into the account so as to show 100K going INTO the account. This was accepted !

    I realize the Jzhang post may be considered inappropriate spam but I think its a good example for those looking to go into the mainland, that HK IS a very beneficial first step.

    HKG has fought for lots of advantages with the likes of CEPA and you should choose your legal guardians with care. These guys posting on just an e mail link?? Buyer BEWARE.


  6. #6

    Join Date
    Jul 2006
    Posts
    399

    Best to get yourself an actual tax expert in HK with Mainland expertise. CEPA should be your friend in this case, as others have stated.