China: Tax on non resident transportation enterprises

On 01 August a notice issued by the State Administration of Taxation of China for the Provisional Measures on the Collection of Tax on Non-resident Taxpayers Engaged in International Transportation Business (“the Provisional Measures”) came into effect. Despite being entitled ‘ Provisional Measures’ the notice will have the force of law in China and will continue to apply until such time as they are replaced by another regulation.

The Provisional Measures contain a wide definition of what amounts to “international transportation business”, including any transportation into or out of Chinese ports whether via owned or chartered ships, and subjects such business to Enterprise Income Tax (“EIT”). It also provides that voyage charters and time charters are subject to the applicable tax rate for transportation services. This removes any doubt as to whether charter hire under time charters are considered as income from transportation services or property leasing (the latter being subject to different tax rates). Interestingly, demise charters fall outside the scope of the Provisional Measures.

A further aspect which foreign shipowners – defined as Non-Resident Taxpayers (“NRTs”) – need to take note is the prescribed mechanism for collection of tax under the Provisional Measures. Apart from self-registration in China for NRTs, the Provisional Measures reinforce the existing obligation for Chinese companies to act as withholding agents for EIT and other applicable taxes (e.g. Value Added Tax) when making payments to NRTs.

NRTs from countries that have tax treaties with China may apply for exemption from taxes relating to international transportation business.  

The Provisional Measures reflect an overall tightening of the taxation regime in China, and are likely to have a far-reaching impact on shipowners who deal with Chinese counterparts, or whose vessels call into China. Members should consider checking if there are any existing tax treaties between their countries of residence and China. Legal assistance should also be sought from Chinese lawyers when considering the inclusion of charterparty clauses that may include reference to this tax, as any clauses may have the potential to be construed under Chinese law as an attempt to evade taxes.  

A brief article and summary of the effect of the Provisional Measures prepared by the firm of Wang Jing & Co. can be found here.