or a reduced 5% withholding tax rate on dividends paid by mainland entities, provided that certain conditions are satisfied. This article outlines the legal basis, eligibility criteria, and compliance procedures for accessing the 5% preferential rate.
I. Legal and Treaty Framework #
1. Corporate Income Tax Law of the People’s Republic of China (2018 Amendment) #
- Article 3(3): Non-resident enterprises that have no establishment or place of business in China—or whose Chinese-source income is not effectively connected with such an establishment—are subject to corporate income tax on income sourced within China.
- Article 4(2): The applicable tax rate on such income is 20%.
- Article 27(5): Certain types of income, including dividends, may qualify for exemption or reduced rates of corporate income tax.
2. Implementation Regulations for the Corporate Income Tax Law (2019, State Council Order No. 714) #
- Article 91(1): Dividends under Article 27(5) of the Corporate Income Tax Law are subject to a reduced withholding tax rate of 10%.
3. Mainland–Hong Kong Double Taxation Arrangement (2006, with subsequent protocols) #
- Article 10:
- China retains taxing rights over dividends paid by a Chinese enterprise.
- A 5% withholding tax applies if the Hong Kong company directly holds at least 25% of the capital of the Chinese company.
- In other cases, the withholding tax rate is capped at 10%.
- Protocol IV, Article 4: If a structure has been arranged primarily to obtain treaty benefits, the relevant articles of the Arrangement shall not apply.
4. Key Administrative Guidance: #
- STA Announcement [2018] No. 9 – Interpretation of “Beneficial Owner” in the Context of the Dividend Article
- SAT Circular [2009] No. 81 – On the Implementation of Dividend Article Conditions
- STA Announcement [2019] No. 35 – Administrative Measures for Non-Resident Taxpayers Claiming Treaty Benefits
II. Conditions for the 5% Preferential Withholding Tax Rate #
1. Minimum Shareholding Threshold #
Under Article 10 of the Arrangement, the Hong Kong company must directly own at least 25% of the equity in the mainland paying company.
Per SAT Circular [2009] No. 81, this requirement must be continuously met during the 12-month period preceding the dividend distribution.
2. Beneficial Ownership Requirement #
To enjoy the reduced tax rate, the Hong Kong company must qualify as the “beneficial owner” of the dividends as defined under STA Announcement [2018] No. 9.
(1) Negative Indicators #
A Hong Kong company is unlikely to qualify as the beneficial owner if any of the following apply:
- More than 50% of the dividend income is remitted to third-country residents within 12 months of receipt.
- The company is a conduit or holding vehicle with no substantive business operations or management in Hong Kong.
(2) Indirect Ownership Exception #
Where the Hong Kong company is not the beneficial owner, but its 100% shareholder satisfies any of the following, beneficial ownership may still be recognized:
- The shareholder is a tax resident of the contracting party (i.e., Hong Kong); or
- If not a Hong Kong resident, all intermediate entities and the ultimate owner satisfy beneficial ownership conditions.
The 100% ownership must be maintained for at least 12 consecutive months prior to the dividend payment.
(3) Automatically Qualifying Entities #
Certain applicants are automatically treated as beneficial owners:
- Governments of the contracting parties;
- Publicly listed companies resident in the contracting party;
- Individuals who are tax residents of the contracting party;
- Entities directly or indirectly 100% owned by the above, provided that intermediate shareholders are PRC or Hong Kong residents and the 12-month rule is met.
III. Tax Filing and Documentation #
Under STA Announcement [2019] No. 35, non-resident taxpayers must self-assess their eligibility and submit the Information Report for Claiming Treaty Benefits by Non-Resident Taxpayers to the withholding agent.
Supporting Documents Required for Record Filing: #
- Tax Residence Certificate issued by the competent authority in Hong Kong for the current or preceding fiscal year;
- Contracts, shareholder resolutions, payment vouchers, and other documentation supporting entitlement to the dividend;
- Documentation evidencing beneficial ownership, where applicable;
- Any additional documentation necessary to substantiate eligibility for treaty benefits.
Conclusion #
To enjoy the 5% reduced withholding tax rate on dividends distributed by a Chinese company, a Hong Kong company must:
- Directly own at least 25% of the Chinese company for at least 12 months before dividend payment;
- Qualify as the beneficial owner under Chinese tax rules;
- Provide a valid tax residence certificate and maintain relevant records.
Failure to meet these conditions will result in the application of the standard 10% withholding tax rate. Companies should carefully plan their investment structures and comply with applicable tax rules and treaty provisions to ensure access to preferential rates.
This article is for informational purposes only and does not constitute legal advice. For case-specific consultation, please contact us. Read our full Legal Disclaimer, which also includes information on translation accuracy.
