China: The State Administration of Taxation expands the circumstances of issuing Tax Residency Certificate

In 2016, the State Administration of Taxation (SAT) issued the Announcement of the State Administration of Taxation on Matters Relating to the Issuance of Certificates of Chinese Tax Resident (Announcement 40), which stipulates that companies or individuals as applicants may apply the Tax Residency Certificate (TRC) with the tax authorities, so as to enjoy the benefits of tax treaties signed by the Chinese government. These include respective tax provisions in agreements on air, sea and automobile transportation, as well as mutual tax exemption agreements on international transportation income or exchange of letters (collectively referred to as tax treaties).

In 2019, the SAT issued Announcement of the State Administration of Taxation on Matters Relating to Adjustments to the Certificate of Chinese Tax Resident (Announcement 17), which adjusts certain provisions regarding the issuance of TRC as stipulated in Announcement 40.

Both Announcement 40 and Announcement 17 specify that the issuance of TRC is for the sole purpose of enjoying the treaty benefits. Although the main applicable circumstance for applying a TRC is to enjoy tax treaty benefits, there are other legal, financial and regulatory reasons that may also require Chinese tax residents to provide a TRC, including but not limited to:

• Banks: reporting financial accounts held by foreign tax residents to their supervisory authorities; preventing offshore tax evasion and money laundering; when opening a bank account, transferring large amounts of funds or making overseas investments, the tax resident status must be confirmed; if the customer earns interest, dividends or other income through investment, the bank needs to apply the correct withholding tax rate; if the customer holds foreign investment through the bank, the bank needs to determine whether the income is withheld at source or enjoys treaty treatment.
• Other financial institutions and investment platforms: stock and fund investment institutions need to confirm the tax resident status to apply the correct withholding tax rate or to enjoy tax treaty benefits and comply with the provisions of international tax laws.
• Foreign governments and immigration authorities: work permit, residence visa or investment immigration requirements in some countries.
• Corporate clients and business partners: for purposes of cross-border transactions, joint ventures and M&A due diligence.
• Legal and compliance departments: under the requests of auditors, regulators, and legal professionals for KYC, AML compliance, and tax audits.
• Foreign real estate authorities: for purposes of determining tax obligations on property transactions.
• Trusts & estate planning professionals: for purposes of international estate planning and inheritance matters.

Recently, the SAT issues Announcement of the State Administration of Taxation on Relevant Matters Concerning the Certificates of Chinese Tax Resident (Announcement 4), which will be effective from April 1, 2025. It expands the circumstances of issuing a TRC, which allows the applicants choosing whether to enjoy treaty benefits when applying for a TRC based on actual needs. The latter will cover various circumstances that Chinese tax residents may be encountered overseas for a TRC.

In addition, Announcement 4 clarifies that domestic and overseas branches of Chinese resident enterprises (Branches), as well as sole traders, sole proprietorships and partnerships registered in China cannot apply for the issuance of TRC, but may proceed under the following circumstances:

• The Branches shall apply the TRC through their head offices with the competent tax authority of the head office.
• Sole traders in China shall apply the TRC by the Chinese resident owner with the competent tax authority of the soler traders in the place of operation and management.
• Sole proprietorships in China shall apply the TRC by the Chinese resident investors with the competent tax authority of the soler proprietorships in the place of operation and management.
• Partnerships in China shall apply the TRC by the Chinese resident partners with the competent tax authority of the Chinese resident partners.

Announcement 4 will bring benefits to the outbound investments by Chinese investors, foreign invested companies and foreign individuals in obtaining the TRC.