Chinese Company Won’t Wire You Money Part II: Is It Taxes?

This is the second in a series of posts about problems encountered when attempting to get paid by a Chinese company. In Chinese Company Won’t Wire You Money. Have the Rules Changed? I looked briefly at the underlying framework of rules applying to foreign conversions and remittances. In this post I consider tax-related issues that can often cause payment delays or defaults. These issues vary depending on the nature of the payment. Let’s look at the the sort of payments our China lawyers most frequently encounter.

Payments to foreign service providers. Chinese tax authorities routinely impose a tax on all payments from Chinese companies to foreign service providers. The problem is identifying the appropriate tax. Is it withholding, VAT, business tax, income tax or some combination? Even when the appropriate kind of tax, or combination of taxes, has been determined there is little consistency on the percentage amount of tax withheld.

Royalties. Where there is a royalty payment for a technology or an IP transfer, the underlying contract is supposed to be registered, which can be a time-consuming procedure in certain districts. For example, where the royalty is for a license to publish, the license must be approved by the Beijing authorities in charge of that area of publication. Where the license is for a trademark, the license must be registered with the trademark office. If there is no registration, no payment can be made. For royalty payments, the liability for withholding and VAT is clearer but there is still little consistency on the rates of tax and how they are combined.

FDI or M&A. Such payments from China require approval and usually this approval must come from Beijing. Approval is uncertain and the authorities may change their minds. Thus, a transaction the Chinese side in good faith assumed was approved can be denied at the last minute due to a sudden and unexplained denial of permission to remit.

There are two difficulties common to all three kinds of remittances.

First, tax authorities in many districts now require proof of the existence of the foreign payment recipient. Compliance with this additional requirement often requires providing certificate of good standing authenticated by the Chinese embassy or consulate in the foreign country concerned. This is expensive and time-consuming.

Second, the procedures are often interpreted and applied differently from bank-to-bank, branch-to-branch and district-to-district. The tax rates, too, are not always consistent from district-to-district and even within districts from officer-to-officer. The whole situation is in flux.

The result is that there is really no way any side of a China deal can be certain a payment will go through until after the payment is received.

In my next post I will look at the due diligence you can do to identify or avoid defaults or delays in money transfers out of China.

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