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China Announces a Unified Measure Regarding Foreign Company’s Representative Office’s Taxation
Considering the comparatively simple and convenient setting up process and relatively low operating costs, registering a Representative Office (RO) is generally the initial step for foreign companies wishing to invest in and experience the local market. On 20 February 2010, the State Administration of Taxation (SAT) issued a circular entitled Tentative Measures for the Administration Offices of Foreign Enterprises, to regulate and unify previous rules covering taxation matters of ROs established in the PRC.
Circular 18 takes retroactive effect from 1 January 2010. Taxand China examines the impact on non-resident entities and actions that can be taken immediately by non-residents.
A signifying difference from previous tax treatments of ROs is that ROs can not apply for Enterprise Income Tax (EIT) exemption and all exemptions previously approved should be cleared. ROs are required to adopt the "actual amount method" or "deemed amount method" to determine taxable turnover and profits based on their actual conditions. However, ROs which are eligible for an exemption from EIT pursuant to a relevant tax treaty (or tax arrangement) may still apply for the exemption in accordance with the Administration Measures on the Application for Preferential Treatment under a Tax Treaty by Non-residents.
Another significant difference is that the deemed profit rate is increased from 10% to no less than 15% where the deemed amount methods are applicable, which illustrates that the total EIT and Business Tax (BT) burden will be obviously increased.
The purpose of Circular 18 is to strengthen the collection and administration of taxes on ROs. The Circular abolishes the old approval procedures for a tax exemption application, requires a revisit of ROs that were tax exempt and increases the deemed profit rate. To some extent, these new measures may discourage foreign companies from setting up ROs in China. Foreign investors should examine whether their ROs qualify for a tax exemption under the new rules. If the answer is negative, converting the RO to a wholly foreign owned company may be an alternative.
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