Qiming Lu From PwC: An innovator and practitioner of Chinese Tax Resident Enterprise application

As the economic globalization process is accelerating, more and more companies are closely "linked" with the others. The transnational management has also become the only choice for enterprise development, especially in the process of many global company "going out" strategy, which pay special attention to the determination of tax resident enterprise identity with building a tax structure. According to the official data of the State Administration of Taxation in China (“SAT”) , the identification information of non domestic registered tax resident enterprises (“PRC TRE”)had exceeded 180 by the end of November 2022, and all the applications were submitted actively by enterprises .

Is it the norm for non-domestic enterprises to be recognized as PRC TRE? What are the benefits of recognition?

Qiming Lu,who is a Chinese tax partner and practitioner of Chinese tax resident enterprise (“PRC TRE” ) application, will tell us the answer. Ms. Lu is graduated from Shanghai University of Finance in 1999 and then joined in PwC at the same year, and then studied in the EMBA of Arizona State University in the United States, from the "Leader" partner of PwC Asia Group of the International Tax Department in New York, and then returning to China and serving as a PwC China partner. She has made a significant contribution to the reform of taxation duringhercareer. Today, let's listen to her outstanding contributions in this field.

What does a China Tax Resident Enterprise (PRC TRE) mean?

Article 2 of the Enterprise Income Tax regulations of China, the term ”a resident enterprise” means any company which was established in the State under the laws of China or accordance with the law of a foreign country (region), and its effective management in China.

This concept was written into the tax law from an event. In 2009, Hong Kong branch of the world's largest glass enterprise met the challenge of double taxation due to the change of the new corporate income tax law, and many ways were unsuccessful. Ms. Lu, who is a tax partner at PwC China, took over this "difficult bone". She and her team worked day and night to come up with the concept of "resident enterprise", which ultimately saved nearly 10 million dollars a year. The so-called "identity recognition" refers to the identification of Chinese tax resident enterprises, that is, when a Chinese-owned subsidiary within a group pays dividend to it, it is a dividend between eligible resident enterprises, which can be regarded as tax-free income and exempt from tax. At the same time, enterprises will be eligible for a variety of domestic tax incentives, which will facilitate the treatment of tax treaties between China and the country (region) of registration and third countries, as these tax management will be more compliant.

This is the first case which is approved of private enterprises by the state Administration of Taxation in China, proposed the concept of innovative tax. It not only greatly reduces the tax burden of enterprises, but also avoids the loss of tax revenue, which is both beneficial to the people and the country.

Following this event, In the same year, the State Administration of Taxation issued the Notice on Issues Related to the Recognition of Overseas Chinese-owned Holding Enterprises as Resident Enterprises Based on the Standards of Effective Management (GSF [2009] No. 82) , which stipulates the substantive issues of tax residency, tax treatment and dual resident status of overseas Chinese-funded enterprises. In 2011, the State Administration of Taxation (SAT) issued the Announcement on Issuing the Administrative Measures for Income Tax for Enterprises Controlled by Overseas Registered Chinese Investors (for Trial Implementation) (SAT Announcement No. 45 [2011]), which laid out detailed provisions on procedural issues on how to determine whether an overseas Chinese-owned enterprise is a Chinese resident enterprise. In 2013, the State Council issued the Decision of the State on the Cancellation and Decentralization of a Batch of Administrative Examination and Approval Projects, canceling and decentralizing of seven tax administrative examination and approval projects. Among them, the Notice of the State Administration of Taxation on Issues Related to the Recognition of Overseas Registered Chinese-funded Holding Enterprises as Resident Enterprises in accordance with the Standards of Actual Management Institutions is decentralized to provincial and lower tax authorities. Since then, the identification process has accelerated significantly.

What are the benefits of identification?

"For enterprises, applying for resident identification means an opportunity to save taxes and reduce tax risks," Ms. Lu said.

In terms of tax savings, the Chinese Enterprise Income Tax Law shows that dividends between resident enterprises are not taxed, and after the overseas subsidiary is recognized as a Chinese resident enterprise, the domestic grandson company is not taxed when distributing dividend, and the domestic parent company does not need to pay tax when it receives dividend from the subsidiary. In addition, an overseas Chinese-owned enterprise is recognized as a PRC TRE, it can principally become eligible subjects under many preferential tax policies in the Mainland. Taking the red-chip listing structure as an example, if an overseas Chinese-owned enterprise is recognized as a PRC TRE, it can avoid double taxation of a sum of income from equity investment, reducing the overall tax payment cost of the enterprise group, and there is no formal or substantive restriction on the repatriation of profits to China.

In terms of tax risks, the actual management institution of an overseas Chinese-funded enterprise is originally obliged to pay taxes in China because its status of tax resident is not clear, and it often does not fulfill its Chinese tax obligations. After being recognized as a Chinese tax resident, it will be included in the management scope of the competent domestic tax authority, and tax compliance will be more standardized.

In addition, as the deepening of the BEPS action, most low-tax areas beyondtheboundaries have begun to introduce economic substance laws under the pressure of international organizations such as the OECD, which put forward economic substance requirements for enterprises registered in their territory. Under these regulations, businesses that do not meet the economic substance requirements either receive penalties or recognize them as tax residents in other countries to avoid penalties. For Chinese enterprises registered in these regions, it is also one of the ways to exempt local enterprises from punishment by identifying local enterprises are recognized as Chinese resident ones according to the actual location of the management organization.

Nowadays, with the enhancement of the linkage effect between domestic and international market resources, enterprises are facing different tax challenges while they are facing "going out" to deeply participate in global industrial cooperation and division of labor. Ms. Lu led the team to continue to strive to promote the construction of a new type of international tax relationship with win-win cooperation, serve more enterprises to "go global" with high quality, and make them go lighter.（Liu Fang）