As cross-border trade in services continues to grow, Chinese enterprises frequently pay consulting fees, design fees, technical service fees, and other forms of remuneration to foreign service providers in the course of their operations. In practice, whether the Chinese paying entity is required to withhold and remit corporate income tax (“CIT”) on such payments made to non-resident enterprises has become a common but complex legal issue.
This article provides a structured legal analysis of whether outbound service payments constitute taxable income in China and whether a withholding obligation arises. The analysis is based on the Corporate Income Tax Law of the People’s Republic of China (“CIT Law”), the Implementation Regulations of the CIT Law, SAT Announcement [2017] No. 37, and relevant amendment announcements.
I. Determining Whether the Income Is Sourced in China #
(1) Legal Basis #
According to Article 3, Paragraph 3 of the CIT Law:
“A non-resident enterprise that does not have an establishment or place of business in China… shall pay corporate income tax on its income derived from sources within China.”
Article 7(2) of the Implementation Regulations provides:
“The term ‘income derived from sources within or outside China’ as used in Article 3 of the CIT Law shall be determined as follows:
(2) Income from the provision of services shall be determined based on the location where the services are performed.”
(2) Practical Considerations #
Where the services are performed entirely outside China—such as consulting, market research, remote training, or design services—the resulting income is generally regarded as foreign-sourced income, and not subject to CIT in China. However, if the services are performed wholly or partially within China (e.g., by dispatching personnel into the country), the income will be regarded as China-sourced, even if the contract is executed and payment is made abroad.
The decisive factor is therefore the location where the services are actually performed, rather than the place of contract signing or payment.
II. Whether Withholding Obligations Apply #
(1) Applicable Provisions #
According to Article 37 of the CIT Law:
“Corporate income tax on income referred to in Article 3, Paragraph 3 hereof that is derived by non-resident enterprises shall be withheld at source, with the payer designated as the withholding agent.”
(2) Definition of Withholding Agent #
Under Article 104 of the Implementation Regulations and Article 2 of Announcement 37, even if payment is made by a third party (e.g., a guarantor or agent), the original obligor (such as the entrusting party or the guaranteed party) remains the withholding agent.
Once a Chinese company makes a payment that constitutes China-sourced income to a non-resident enterprise, the payer is required to withhold CIT at the time of payment or when payment becomes due, and to report and remit the tax within seven (7) days, in accordance with Article 40 of the CIT Law and Article 7 of Announcement 37.
III. Practical Compliance Recommendations #
- Conduct tax compliance assessments prior to contract execution to determine whether the services will be performed in China.
- Clarify tax burden allocation in the service contract. If the Chinese party agrees to bear the tax cost, gross-up calculations must be performed in accordance with Article 6 of Announcement 37.
- Review applicable tax treaties, as reduced rates or exemptions may be available, and ensure supporting documentation is prepared and retained.
- Preserve documentary evidence such as work reports, timesheets, communication records, and deliverables to substantiate the location of service performance in case of audit.
- Establish internal withholding and reporting procedures to mitigate potential penalties, late payment interest, or reputational risk.
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