Your company has had a successful year, and the partners have all agreed to disperse dividends to the shareholders. But who has to pay what percentage of their returns in taxes? It can be confusing, so Ive written this guide to give you a hand.

A Fictional Scenario:

There is a Joint Venture Toy Manufacturing Company in Ningbo.

The shareholders are as follows:

A. a Hong Kong company (Non-resident taxpayer), Goodvision Ltd, holding 35% of the shares

B. a Chinese company (resident taxpayer), Goodluckinvestment Co. Ltd, holding 10% of the shares

C. a Germany company (Non-resident taxpayer), Goodchoice GMBH, holding 40% of the shares

D. an American individual (Non-resident taxpayer), Josh Steed, holding 10% of the shares

E. a Chinese individual, Mr Lee (resident taxpayer), holding 5% of the shares

Note: For the Enterprise Income tax in mainland China, the flat rate is 25% (exclusive of low-profit micro-enterprises)

For the year 2013, the company made a USD 222,222.23. profit after paying the Enterprise Income Tax. On March 1, 2014, it decided to remit the dividends to the shareholders. However, according to company law, the company has to charge 10% of the Reserve Fund for the company before distributing the profit, so the available distributable Profit is only US$200,000.00 [USD222,222.23*(1-10%)].At the same time, the tax bureau will impose the taxes on the dividends for the different shareholders.

The tax implications on the dividends are set out below:

1.According to the Hong Kong and Mainland China Tax Treaty (GuoShuiHan[2008] No.112), Goodvision Ltd.(HK) needs to pay only 5% of the Corporate Tax if the shareholder percentage is over 25%. So, the tax payable is USD 3,500.00(200,000*35%*5%). This is what is referred to as withholding tax on the dividends.

2.As the China Enterprise Income Tax Law (EIT) states; In mainland China, if a resident company (as a parent company) invests in another company (as a subsidiary company) and receives the dividends from the investee, the tax is exempt unless there is some tax rate gap (i.e. in some special districts, the enterprise income tax rate is only 15%). So Goodluck Co. Ltd. has no tax to pay. (20,000,000*10%*0%)

3.According to the EIT, if a foreign company (non-resident taxpayer) receives dividends from a resident company in mainland China, the incentive withholding tax on dividends rate is 10%. In this case, Goodchoice GMBH would have to pay USD 8,000.00 (USD 200,000*40%*10%).

4.According to the China Individual Income Tax Law (CIT), a foreign individual (Non-resident taxpayer) receives dividends from a Joint Venture (JV) or Wholly Foreign-Owned Enterprise (WF0E) in mainland China, the tax is exempt. In this case, Josh Steed has no tax to pay. (20,000,000*10%*0%)

5.According to EIT, when a Chinese individual receives dividends from any company in mainland China, the tax rate is 20%. In this case, Mr Lee has to pay USD 2,000.00(200,000*5%*20%)

So we could see that the tax burden on the dividends for the different shareholders. See table:

In a word, the tax burden for a foreign individual is lowest (zero). And for the HK company is second low (5%). So according to the above analysis, if the foreign investors have the chance to choose who become the shareholders at the beginning, the individual as the shareholders is the first choice from the tax perspective.

If the laws regarding individual taxation still perplex you, dont worry, there are plenty of people to help. Feel free to contact me for any advice or accounting services you may need.

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）