Tax Sparing Credit, also known as tax sparing, refers to the tax that a foreign country deducts or exempts from the taxpayer's foreign-sourced income, being viewed as already paid by the country of residence, which is a system that also gives tax credit treatment.
Tax sparing credits are a product of the will of the contracting parties and must be achieved through bilateral or multilateral arrangements. The purpose of tax sparing and credit is to avoid and eliminate legal international double taxation or economic international double taxation, and also to ensure actual effects from the preferential tax policies and measures of the source country for utilizing foreign capital. Tax sparing credit is a special credit system developed on the basis of credit law.
The scope of application of the tax sparing credit is to provide a sparing credit for the reduction and exemption of withholding tax such as dividends, interest and royalties. The second is to provide tax sparing credits for tax reductions and exemptions for business income. Thirdly, after the conclusion of the tax treaty, the government of the source country will grant tax relief and credit based on the newly promulgated tax preferential measures stipulated by the domestic tax law.
Policy
1. The income obtained by a resident enterprise from a country (region) with which the Chinese government has concluded a tax agreement (or arrangement) enjoys tax exemption or tax reduction treatment in accordance with the tax law of the country (region), and the amount of the tax exemption or tax reduction is in accordance with the tax agreement. If it is stipulated that the tax paid should be deemed to be credited against the tax payable in China, the tax exemption or tax reduction amount can be used as the actual overseas income paid by the enterprise to apply for tax credit.
2. The tax sparing credit shall be calculated according to the following circumstances:
(1) If the tax treaty stipulates a fixed rate of sparing credit, the amount of sparing credit is the amount by which the foreign income tax payable calculated at the fixed rate exceeds the actual foreign income tax paid;
(2) If a tax treaty stipulates that a country’s tax incentives are listed to grant sparing credits, the sparing credits shall be the amount of the payable income tax calculated at the tax rate stipulated by the tax laws of the source country (region) exceeding the actual tax paid, that is, actual tax credit.
Applicable conditions
1. The source country (region) of overseas income that enjoys the spare credit must be a country (region) that has concluded a tax agreement (or arrangement) with the Chinese government and has spare credit clauses.
2. The overseas income that enjoys the sparing credit must be exempted or deducted in accordance with the tax laws of the country (region) of the source of the income, and the amount of such exemption or deduction shall be regarded as the amount of tax paid in accordance with the provisions of the tax treaty. It can be regarded as tax paid when it declares foreign income tax.
3. The overseas income obtained by the enterprise is not determined to be taxable income of the host country according to the tax laws and regulations of the source country, but is taxable income according to the tax laws and regulations of China, does not belong to the category of tax sparing and credit, and should be fully charged according to Chinese tax Laws and regulations stipulate the payment of corporate income tax.
4. If the overseas income is calculated by the simple method, the spare credit is not applicable.
