By Victor Tu

The globe is more flat than that 10 years ago. Many Chinese companies (inclusive of WFOEs) are using the overseas services across the world. In most cases, the services include design, technical support, consultancy, royalties, etc. Today, I would like to share with you that how the Chinese companies withhold taxes when they make the service payment to the overseas service suppliers.

Scenario:

One WFOE is a clothing manufacturer in Ningbo, they use the design from an Italian fashion studio (the design services are completed in Italy) by paying USD 20,000 per month and at the same time, the company joins the Italian International Fashion Association and using their logo on the products，they have to pay the royalty fee each year (paid USD 30,000 at the beginning of the year).

Tax implication analysis:

l Whoever is the fashion studio or the fashion association, since they obtain the service profits from China, they have the taxes responsibility here (they are all non-resident taxpayers). And the Chinese company (service buyer) has to withhold the taxes when they pay the money to the overseas suppliers.

l In this case, the first business is called overseas design, in accordance with the Chinese Tax law, if the design is completely finished outside China or the studio sends the staff to China who stays less than 90 days within a tax year. The non-resident taxpayers only bears the indirect taxes(VAT and surcharges)

l The second nature of the business is Royalty fee, this is subject to the indirect taxes (VAT and surcharges)and direct tax(10% withholding Enterprise Income Tax)

Which means, the Chinese company has to withhold RMB7978 taxes for the Italian Fashion Studio and net amount they received is USD 18,713.00[(124000-7978)/6.2] every month, the tax burden will be 6.43%.

  2. Royalty Fee

In the example, the royal fee is USD30,000 each year. Assuming the FX rate is 6.2 as well, the taxes are calculated as follows:

Tax base=USD30,000*6.2=RMB186,000

So for the Royalty Fee, the payment after tax will be USD25, 240[(186000-29514)/6.2], and the tax burden will be 15.87%.

In conclusion, when the Chinese companies (WOFE) sign the overseas service contract, to avoid the taxes risks, they’d better notify the taxes on the terms, i.e. who will bear the taxes and confirm the nature of the services.

Keywords: Ningbo accounting, Ningbo Auditor, Ningbo accountants, Ningbo CPA

关键词：宁波会计，宁波审计，宁波会计师，宁波涉外会计，宁波注册会计师

Victor & Truman，CPAs  宁波纬度会计师事务所（普通合伙）