The international tax law applicable in Mainland China is derived from a combination of domestic and international sources of authority.

The domestic legal framework for international taxation primarily consists of the following:

• Constitutional provisions – The Constitution provides the fundamental legal basis for the state’s tax sovereignty.
• Tax statutes – Key legislation, such as the Law of the People’s Republic of China on the Administration of Tax Collection (“PRC Tax Collection and Administration Law”) is a foundational law for issues regarding tax collection and administration. It governs the levy and payment of taxes, protects both national tax revenue and taxpayers’ rights, and forms the essential domestic legal basis for implementing international tax rules. Furthermore, international taxation-related provisions, such as the anti-avoidance clauses in the Corporate Income Tax Law of the People’s Republic of China (“PRC CIT Law”) and the Individual Income Tax Law of the People’s Republic of China (“PRC IIT Law”), also form the foundation of China’s international tax framework.
• Administrative rules and interpretations – Detailed implementation is guided by administrative tax circulars, rules, and interpretative documents issued by the State Taxation Administration (“STA”). These documents provide the practical operational guidelines for applying both domestic tax laws and international tax agreements.

China’s international tax obligations and co-operation frameworks originate from the following instruments:

• Bilateral double taxation agreement (“DTA”) – China has established an extensive treaty network by signing comprehensive DTAs with over 100 countries and regions.
• Special regional arrangements – Reflecting the “one country, two systems” principle, the Mainland signed special double taxation arrangements with the Hong Kong Special Administrative Region (“SAR”) and the Macao SAR. These are functionally equivalent to DTAs and facilitate cross-border tax co-ordination within the nation.
• Multilateral tax conventions – China’s active participation in international tax conventions has established a vast framework that facilitates cross-border tax co-ordination and prevents tax base erosion.

Case law does not feature prominently within the tax law system of China, a civil law country.

In academic discussions of international tax law, its sources are generally categorised into the following four types:

• DTAs – among the four sources of international tax law, bilateral and multilateral tax treaties are the most substantive.
• Treaties and agreements – legal norms governing global tax co-ordination within other international conventions, treaties and agreements, such as in trade agreements or treaties of friendship, commerce and navigation.
• International customary tax law – this refers to universally accepted practices that serve as the unwritten rules of conduct in international tax relations.
• Soft law – normative documents endorsed by international organisations.

Whereas domestic tax law regulates tax collection and the relationship between the state and taxpayers (domiciled and foreign taxpayers), international tax law primarily governs the co-ordination of taxing rights between states.

International and domestic tax law are functionally interdependent.

International tax law takes precedence over domestic tax legislation. Article 58 of the PRC CIT Law and Article 91 of the PRC Tax Collection and Administration Law explicitly stipulate that if a tax treaty or agreement involving the People’s Republic of China and a foreign country contains provisions different from those of the aforesaid laws, the provisions of the treaty or agreement will prevail. This establishes a binding principle of treaty precedence within the Chinese legal system.

In practice, however, international tax law relies on domestic law for its enforcement and operational effect. Domestic legislation provides the essential procedural and administrative framework. For instance, the application of preferential withholding rates under DTAs or the implementation of the Automatic Exchange of Information (“AEOI”) under multilateral conventions must be enforced through specific domestic rules and procedures. The PRC Tax Collection and Administration Law, along with a series of provisions on the withholding of tax on China-sourced income, exemplifies how domestic law operationalises and facilitates the smooth functioning of international obligations.

Thus, the relationship is one of normative supremacy of international law, coupled with practical dependence on domestic legal machinery for implementation.

The terms and core principles of China’s DTAs are consistent with the OECD Model Tax Convention and the UN Model Double Taxation Convention. However, in their practical implementation, Chinese tax authorities have adopted more stringent interpretations and requirements in specific areas, as detailed below.

• Stricter “beneficial owner” (“BO”) criteria: China’s domestic tax circulars impose more rigorous conditions for claiming treaty benefits than those suggested in the OECD Commentary. For instance, according to the Circular on Issuing the Agreement between the Government of the People’s Republic of China and the Government of the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income and Interpretations on the Clauses of the Protocols thereof, a non-resident enterprise must qualify as the BO of income, such as dividends, interest, or royalties, to be eligible for preferential withholding tax rates. This requirement has been further tightened by the Announcement of the State Administration of Taxation on Issues concerning the Beneficial Owner in Tax Treaties (Announcement of the State Administration of Taxation [2018] No 9, or “Circular 9”). Circular 9 stipulates that to be recognised as a BO, an entity must not only have control over the income and related assets but must also conduct substantive business operations. It also provides a list of negative indicators that are used to assess whether an entity lacks the substance to be a BO.
• Additional holding period requirement for dividend benefits: While the OECD Model Convention states that it is at the discretion of the contracting states to include or exclude a condition requiring a company receiving dividends to own at least 25% of capital for a designated period before distribution, China’s interpretation is explicitly stricter. According to the Circular of the State Administration of Taxation on Relevant Issues Concerning the Implementation of Dividend Clauses in Tax Treaties, to avail itself of the preferential DTA rate on dividends (eg, the 5% rate for a 25% or greater shareholding), the foreign recipient company must have held the equity interest in the Chinese company continuously for at least 12 months prior to the dividend declaration. This imposes a concrete holding period prerequisite not universally required by the model convention.

The PRC was an early participant in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”), having signed it during the first signing ceremony in 2017. China deposited its instrument of ratification for the MLI with the OECD on 25 May 2022. Following the standard procedural interval, the MLI entered into force in China on 1 September 2022.

China’s tax jurisdiction is founded on a dual principle: residence-based jurisdiction and source-based jurisdiction. This means the tax obligations of a taxpayer are determined by either their resident status in China or the source location of their income, with special rules applying to the Hong Kong and Macao SARs.

Residence-Based Taxation (Worldwide Income)

• Tax resident enterprise (“TRE”): As stipulated in Article 3 of the PRC CIT Law, a TRE (broadly defined as an enterprise established under Chinese law or with effective management in China) is subject to corporate income tax (“CIT”) on its worldwide income.
• Tax resident individual: According to Article 1 of the PRC IIT Law, a resident individual (defined as one domiciled in China, or one without a domicile but who has resided in China for 183 days or more in a tax year) is subject to individual income tax (“IIT”) on worldwide income.

Source-Based Taxation (China-Sourced Income)

Non-TREs and non-resident individuals: China exercises taxing rights over all income derived from sources within Mainland China, irrespective of the taxpayer’s residence status.

• A non-TRE with an establishment or place in China is taxed only on income attributable to that establishment. A non-TRE without such an establishment, or whose China-sourced income lacks a taxable nexus to its establishment, is subject to withholding tax on the non-TRE’s China-sourced income.
• A non-resident individual (as defined under the PRC IIT Law) is generally subject to IIT only on income sourced from within China.

Special Administrative Regions

The Hong Kong SAR and Macao SARs maintain independent tax systems under the “one country, two systems” principle. To resolve potential cross-border tax conflicts and avoid double taxation, the Mainland has entered into special tax arrangements with each SAR, which function analogously to DTAs. Although the PRC and Taiwan have signed a similar arrangement, it has not yet come into effect.

Under the PRC IIT Law and its implementing regulations, an individual is a Chinese tax resident if they meet either of the following two criteria:

• By domicile: An individual is “domiciled” in mainland China if they have a permanent registered address, family ties, or economic interest in the PRC. “Domiciled” individuals in Mainland China are tax residents. For example, if an individual resides overseas due to school, work, family visits, or tourism, and after completing their matters they return to stay in Mainland China, they are a “domiciled” individual.
• By duration of residence: An individual without a domicile in Mainland China but who has resided there for 183 days or more in aggregate within a tax year is a Chinese tax resident.

Chinese tax residents are liable for IIT on their worldwide income. The primary mechanism to alleviate double taxation arising from foreign-sourced income is the Foreign Tax Credit (“FTC”) system, which is subject to the following rules.

Taxation Methods

China implements a hybrid IIT system that adopts comprehensive, business and categorical tax rates.

• Comprehensive income: Includes wages and salaries, remuneration for personal services, and author’s remuneration and royalties, which are consolidated for tax calculation on an annual basis. The amount of taxable income is calculated by subtracting the basic expense of RMB60,000, itemised deductions for specific expenditures, and other deductible items from the balance of annual income. The amount of taxable income is subject to progressive tax rates ranging from 3% to 45%.
• Business income: This is income from production and business operations of individual, industrial and commercial households, investors of sole proprietorship enterprises, partners of partnership enterprises, etc. It is calculated on an annual basis, and the amount of taxable income is the remaining gross income after costs, expenses and losses are deducted, subject to progressive tax rates ranging from 5% to 35%.
• Categorical income: This includes interest, dividends and bonuses, property leasing income, property transfer income and contingent income. Such income is not consolidated with domestic comprehensive income and is separately taxed on a transactional basis at a flat tax rate of 20%.

Foreign Tax Credit (“FTC”) Mechanism: Core Principle and Calculation

Core principle

For the income obtained by a resident individual from outside the territory of China within a single tax year, the amount of income tax that has been levied and paid outside the territory of China under the tax law of the country (region) from which that income is sourced, may be used to offset the amount of IIT payable by the individual for the current tax year, to the extent of the offset quota.

Calculation of the FTC Limit

The overall FTC limit for income from a specific country (region) is the sum of the limits calculated for each category of income sourced from that country:

• FTC limit for comprehensive income = (total IIT payable on global comprehensive income) × (comprehensive income from the specific country/total global comprehensive income);
• FTC limit for business income = (total IIT payable on global business income) × (taxable business income from the specific country/total global taxable business income);
• FTC limit for other classified income = the actual IIT payable in China on that specific classified income from the country; and
• total FTC limit for the country = the sum of the three amounts above.

In accordance with the principle of territorial jurisdiction and relevant tax laws, non-resident individuals are only liable for IIT on income sourced from Mainland China, under the following rules.

Scope of Taxable Income and Sourcing Rules

The following broad categories of income derived by non-resident individuals are deemed to be sourced from Mainland China and are therefore taxable.

• wages and salaries: income attributable to employment services performed within China;
• remuneration for personal services: income from providing services (eg, consulting, performances) within China;
• author’s remuneration: remuneration paid or borne by domestic enterprises, public institutions and other organisations;
• royalties: income arising from the licensing of intangible property for use within China;
• interest, dividends and bonuses: income obtained from domestic enterprises, public institutions, other organisations or resident individuals;
• property leasing income: income from leasing property for use within China;
• property transfer income: gains from the transfer of real property located in China or other properties (eg, equity in Chinese resident enterprises); and
• contingent income: income from prizes, awards, or lotteries obtained within China.

Several nuances are involved in the above categories. For example, for individuals serving as directors, supervisors and senior management personnel of domestic resident enterprises, directors’ fees, supervisors’ fees, wages, salaries, and other similar remuneration (including multi-month bonuses and equity incentives) paid or borne by domestic resident enterprises are regarded as income sourced from Mainland China, regardless of whether the individual performs duties within Mainland China.

Tax Calculation Methods

Non-resident individuals are not eligible for annual final settlement of comprehensive income. Tax is levied item by item on a monthly or transactional basis, and withheld and remitted by withholding agents.

• Wages and salaries: A monthly deduction of RMB5,000 is allowed, subject to the monthly tax rate table for non-resident individuals (progressive tax rates ranging from 3% to 45%).
• Remuneration for personal services, author’s remuneration and royalties: The taxable income is the amount of income per transaction, subject to progressive tax rates ranging from 3% to 45%. Among them, the income amount of remuneration for personal services and royalties is the balance of gross income after deducting 20% for expenses; the income amount of an author’s remuneration is calculated by deducting 20% for expenses from 70% of the gross income.
• Other income (interest, dividends, property income, etc): This is levied on a transactional basis and is generally subject to a flat tax rate of 20%.

In accordance with the PRC CIT Law, the tax-resident status of a legal entity in Mainland China is determined based on either of the following two criteria.

• place of registration: enterprises, public institutions, social organisations, and other income-generating organisations legally established within Mainland China; or
• location of managing institution: refers to enterprises that are established in foreign countries (regions) but hold their “actual management institutions” in Mainland China (the term “actual management institution” refers to organisations that comprehensively manage and control the production and operation, staff, accounting, property, and other aspects of the enterprise).

China’s definition of a permanent establishment (“PE”) operates under a dual framework: a broader concept under domestic law and a more specific, treaty-based concept that aligns with international norms (ie, the OECD Model Tax Convention) while protecting its source taxation rights.

Domestic Law Foundation: “Establishments or Places”

According to Article 2 of the PRC CIT Law and Article 5 of its Implementation Rules, there are two main types of institutions or establishments registered by non-resident enterprises in Mainland China:

• fixed places of business – these encompass a wide range of physical locations used for production or business operations, such as management offices, factories, service provision sites, construction/installation projects, etc; and
• dependent agents – a non-resident enterprise may also create a taxable presence by authorising an agent in China to habitually conclude contracts or perform core functions on its behalf.

Establishing such an “institution or place” under domestic law creates a general tax nexus but does not automatically equate to forming a PE as defined in a DTA. The PE threshold under treaties is typically more stringent.

Treaty Practice

While China’s DTAs incorporate core principles from the OECD Model Tax Convention, the OECD Model positions on key PE issues more closely resemble the UN Model, favouring rules that better protect the taxing rights of source countries (like China) where income arises. The key distinctions are evident in two areas:

• Service provision through personnel clause – Regarding special types of PEs, the UN Model Tax Convention adds a category of service-type PE, which stipulates that “the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue within that country for a period or periods aggregating more than six months within any twelve-month period”. Most tax treaties signed by China with foreign countries refer to the provisions of the UN Model Tax Convention on this clause.
• Construction sites and related activities – The OECD Model Tax Convention stipulates that “the term ‘permanent establishment’ includes a building site or construction or installation project, but only if such site or project lasts more than twelve months”. The UN Model Tax Convention lowers the 12-month designated period to six months and includes “assembly projects and supervision and management activities related to building sites, construction, assembly or installation projects” as possible conditions for determining the existence of a PE, to better safeguard the interests of developing countries. Most tax treaties signed by China adopt the six-month or 12-month standard, with some exceptions for specific treaty partners.

In China, income from immovable property (such as real estate and land) is levied according to the taxpayer’s status (resident/non-resident) and type (individual/enterprise).

IIT on Rental Income

For China-domiciled individuals

Rental income from real estate rentals within or outside China must be declared and taxed in China and is subject to policies stipulated in the “property rental income” category. Rental includes but is not limited to profits from the leasing of buildings, granting of rights to land usage, machinery and equipment, motor vehicles, ships, and other properties.

• Tax rate: The statutory tax rate is 20%.
• Calculation of taxable income:
1. for each income ≤RMB4,000, taxable income = income - RMB800 (fixed expenses); and
2. for each income exceeding RMB4,000, taxable income = income amount × (1 - 20%).

For non China-domiciled individuals

Only rental income from China-based rentals is taxable. A statutory rate tax of 20% applies to each payment and is withheld by the payer.

CIT on Rental Income

For TREs

Income generated from a property (regardless of whether it is from domestic or foreign sources) must be included in the total amount of annual taxable income and taxed at a standard rate of 25% (preferential tax rates may be applied to qualified enterprises).

For non-TREs

Tax procedures depend on the enterprise’s PE status in China and whether the rental income is effectively tied to its operations.

• Scenario 1 (unrelated income): Rental income is considered income sourced from within China and subject to a 10% withholding tax rate if the enterprise does not qualify as a PE or if the rental income is not attributable to the PE. The tax will be withheld and remitted by the payer at the time of payment.
• Scenario 2 (related income): Rental income attributable to the PE must be included in the establishment’s profits and taxed at a rate of 25%.

TREs are subject to CIT on their worldwide income, which includes all operating profits derived from both within and outside China. This income is consolidated and taxed at the standard CIT rate of 25% unless the enterprise qualifies for and applies specific preferential tax policies.

The CIT liability on operating profit of a non-TRE depends on whether it has a PE in China and whether its China-sourced income is effectively connected to that PE:

• Income effectively connected to a PE – Profits attributable to a PE in China constitute the taxable income of that PE. This income is taxed on its net profit (after allowable deductions) at the standard CIT rate of 25%.
• Income not effectively connected to a PE – If a non-TRE has no PE in China, or if specific China-sourced income is not effectively connected to an existing PE, such income is generally subject to withholding tax at a rate of 10% on the gross amount. The tax is generally withheld and remitted by the payer.

In China, the taxation of passive income differs for resident and non-resident taxpayers. The passive income of resident taxpayers is normally included in their current/yearly taxable income, while the passive income of non-resident taxpayers is typically subject to withholding tax at source, where the payer is responsible for filing and remitting the relevant tax.

Under Chinese tax law, withholding tax is a mandatory legal obligation. According to the PRC CIT Law, non-TREs receiving China-sourced income in the form of dividends, interest and royalties, are usually subject to a 10% withholding tax rate. The payer must withhold and remit this tax on behalf of the enterprise upon each payment. Although legal withholding agents often handle the filing on behalf of non-resident taxpayers, non-residents receiving China-sourced income are ultimately liable and should ensure compliance.

Currently, Mainland China has signed bilateral DTAs with more than 100 countries and regions. These treaties typically offer more favourable arrangements for withholding tax rates on passive income.

• Dividends: If the recipient is a tax resident of a contracting state and usually meets a certain shareholding ratio (such as 25%), the withholding tax rate can usually be reduced to 5% or lower.
• Interests: Tax rates can be reduced to 8%, 7% or lower.
• Royalties: The tax rate can be reduced to 7%, 6% or lower.

China does not levy a separate capital gains tax. Instead, gains from the disposal of assets are taxed as part of ordinary taxable income under the CIT or IIT regimes.

Taxation of Individuals

Tax-resident individuals

Income received by resident individuals from the transfer of real estate within China is subject to an IIT rate of 20% under the “property transfer income” category. However, China has recently extended the tax exemption for individuals/families who have owned their only common house for more than five years and are transferring ownership. Taxable income is the balance after deducting the original value of the property and reasonable expenses from the transfer income. Income from the transfer of shares in domestic listed companies is temporarily exempt from IIT. On the other hand, income derived from the transfer of equity in non-listed companies is taxed at a rate of 20%.

Non-resident individuals

If a non-resident individual receives capital gains sourced from the transfer of real estate, equity or other property within China, procured capital gains are subject to the IIT rate of 20%, withheld by the payer at source.

Taxation of Enterprises

TREs

If a TRE receives capital gains from the transfer of various assets, the amount received should be included in the enterprise’s annual taxable income and subject to a uniform CIT rate of 25% (though if eligible for preferential treatment, the corresponding preferential tax rate may apply).

Non-TREs

For non-TREs that have no PE in China, or whose capital gains are not actually connected with their PEs in China, income from the transfer of real estate, equity, or other property in China is subject to withholding tax at a rate of 10%. If the capital gains are attributable to a PE, they should be included in the PE’s annual taxable income and taxed at a rate of 25%.

Basic Taxation Rules

For individual residents

Income from wages and salaries, as well as labour services, belong to comprehensive income that is subject to a progressive tax rate with seven levels, ranging from 3% to 45%. For labour service remuneration, the taxable income is generally equivalent to 80% of the gross receipt. Moreover, the basic standard deduction for wages and salaries is RMB60,000 per year, in addition to other special deductions. Comprehensive income is declared and paid in accordance with monthly withholding and annual settlement of IIT.

For non-resident individuals

Income from wages and salaries, as well as from labour services, is subject to a progressive tax rate with seven levels, ranging from 3% to 45%. For labour service remuneration, the taxable income amount is generally equivalent to 80% of the gross receipt, and the basic standard deduction for wages and salaries is RMB5,000 per month. If a withholding agent exists, it must withhold and pay the tax on behalf of the individual on a per-month or per-transaction basis, with no annual reconciliation required.

Short-Term Assignment

For foreign-sourced income generated from labour services earned by Chinese-domiciled individuals, their foreign-sourced income from the secondment must be consolidated with domestic income for annual tax reconciliation. A foreign tax credit is available to mitigate double taxation.

If a Chinese entity bears the costs of salaries or remuneration of such dispatched employees, or is associated with an overseas institution, it may be deemed the withholding agent in China. In such cases, the Chinese entity may be required to withhold IIT monthly for the total amount of the dispatched employees’ domestic and overseas compensation, rather than having the individual pay taxes on their overseas income during the annual tax reconciliation.

Cross-Border Employment

When Chinese companies hire foreign employees, they need to accurately determine the employees’ tax residency status.

If a foreign national meets the criteria for a resident individual and has a domicile in China, then all their income derived from both within and outside China (ie, global income) is subject to IIT. However, if they do not have a domicile in China, as long as the consecutive years in which they have resided in China for a cumulative total of 183 days are less than six years, their income derived from outside China and paid by overseas entities can enjoy tax exemption after filing with the competent tax authority. If, during the aforementioned six-year period, they are absent from China for more than 30 days in any given year, the year in which they have resided for a cumulative total of 183 days in China will be interrupted and the calculation will restart. Foreign nationals who reside in China for 183 days or more per year over six consecutive years will assume the same tax liability as that of a resident individual based on the domicile criterion. In conclusion, all income that is generated from within or outside China is subject to taxation in China.

Foreign nationals who are non-domiciled individuals are only required to pay IIT on income derived from within China. If a foreign national resides in China for no more than 90 days in a calendar year, their China-sourced income paid by an overseas employer with no establishment or place of business in China is exempt from tax. However, it is important to note that this provision only applies to wages and salaries. The 90-day period is more like a tax threshold than a full tax exemption; if the foreign national stays in China for longer than 90 days, their China-sourced income is subject to full taxation, and any previous income treated as exempt within that same year must be retrospectively declared and taxed.

Remote Work

China’s domestic tax law currently has no specific provisions addressing the novel tax nexus issues posed by remote work arrangements. The tax treatment is generally assessed based on a number of factors, including tax residency status, place of service provision, and DTAs.

Chinese tax law specifies certain types of miscellaneous income that are not prominently featured in the OECD Model Tax Convention.

Other Income not Listed Above Under the PRC IIT Law

• Author’s remuneration: The OECD Model Convention does not establish a separate “author’s remuneration” category for individuals. The PRC IIT Law lists an author’s remuneration as a sub-item of “comprehensive income”, and specifically refers to income made from the publication or dissemination of works like books, newspapers, etc. This is subject to progressive tax rates ranging from 3% to 45%.
• Incidental income: The OECD Model Convention does not list “incidental income” separately; related income is usually included in the “other income” catch-all clause. PRC IIT Law categorises incidental income separately. Accordingly, personal prizes, winnings, lotteries, random lottery prizes, and unexpected gifts are subject to a 20% proportional tax rate on a per-transaction basis.

Other Income not Listed Above Under the PRC CIT Law

• Income from donations received: While the OECD Model Convention does not specifically list “income from donations received”, the Implementation Rules of the PRC CIT Law explicitly classify “income from donations received” as a sub-item of “other income”. Monetary and non-monetary assets received gratuitously from other enterprises, organisations or individuals are thus subject to a tax rate of 25% for resident enterprises. Non-resident enterprises may be subject to withholding tax. This income is recognised on the date of actual receipt.
• Subsidies, penalties and exchange gains: Although the OECD Model Convention does not list these types of income separately, the implementation rules of the PRC CIT Law specifically include them under “other income”:
1. If enterprises receive fiscal funds from the government at the county level or above, the government subsidy can be treated as non-taxable income. If these conditions are not met, they are considered taxable income.
2. The CIT treatment of liquidated damages is executed two ways. From the perspective of the recipient, the total amount procured from liquidated damages should be included in taxable income and is subject to CIT. From the perspective of the payer, liquidated damages can be deducted before tax if the payer obtains genuine, legal and relevant pre-tax deduction vouchers.
3. Exchange gains should be considered taxable income upon accrual (regardless of whether they are realised), and conversely, exchange losses are deductible when incurred (regardless of whether they are realised).

China has not yet issued domestic laws or regulations regarding Amount B, nor has it incorporated the formulaic pricing method for Amount B into its domestic transfer pricing (“TP”) administration system.

As a beneficiary and staunch defender of globalisation, China adopts a supportive and co-operative attitude towards Amount A of Pillar One.

On the one hand, China firmly believes that the growth of the global economy depends on economic globalisation and digitalisation. As such, China strongly advocates for international tax policies conducive to development and recognises that the best way to address tax issues stemming from economic digitalisation is through multilateral negotiations. Thus, China opposes unilateral measures that could trigger trade wars and has consistently acted as a mediating force, with the intention to promote open dialogue and prevent conflict with other nations. On the other hand, over years of international tax practice, China has championed the Market Contribution theory. This underscores the market’s crucial role in the cross-border profit distribution of multinational enterprises (MNEs). To protect the market jurisdictions’ sovereign taxing rights, China promotes equitable tax yields. From this perspective, China’s leading international tax philosophy is consistent with the intentions set out in Pillar One.

Overall, only a few Chinese companies meet both the EUR20 billion revenue threshold and the 10% profitability ratio set out in the agreement. Those that do are mainly concentrated in sectors such as oil, banking and insurance, all of which fall under exclusions of the agreement. However, certain companies (primarily internet enterprises) may be affected to some extent. For example, according to the 2023 European Union Tax Observatory report on Pillar One, China now represents 19.1% of Amount A-covered groups and 17.3% of total Amount A profits, accounting for approximately EUR15.8 billion in taxable profits. Even though China occupies 13 spots out of 68 covered MNEs, ranking second in the world, many Chinese companies still remain unaffected by Amount A.

China has not yet implemented the global minimum tax stipulated in Pillar Two, nor has it specified a specific implementation date.

China has not yet implemented the global minimum tax.

China eschews a special tax category for digital products in favour of adapting the current fiscal framework to the unique characteristics of the digital economy. The tax regime covers digital products through existing tax categories such as value-added tax (“VAT”), CIT and IIT, and implements differentiated tax incentive policies.

The Chinese legal framework distinguishes tax fraud, tax evasion and tax avoidance from one another by designating each with different legal consequences. The cross-border manifestations of such conduct present unique challenges for tax administration.

Tax Fraud

China defines tax fraud as the act of taxpayers obtaining tax refunds from the state through false declarations or other deceptive means. Core elements include fabricating facts and fraudulently obtaining tax refund eligibility. Examples of tax evasion such as taxpayers who make false declarations by forging accounting books and vouchers, signing fake contracts to conceal income, falsely reporting expenses, and fraudulently obtaining tax benefits, constitute “deception or concealment” under criminal law.

Cross-border identification

• Fabricated export refunds: Overstating export prices, falsely declaring goods to qualify for higher refund rates, or using untaxed goods to claim refunds.
• Circular trading schemes: Repeatedly exporting and importing the same goods (often repackaged or misclassified) to fraudulently generate export tax refunds and exploit import duty exemptions.
• Fraudulent use of invoices: Utilising false or illegally obtained VAT special invoices to substantiate fraudulent export refund claims, often in conjunction with other schemes.

Tax Evasion

This refers to the act of evading tax payments by means of deception and concealment such as making false declarations or failing to declare taxes. Characteristics such as subjective intent and illegality are utilised to gauge the severity and scope of the crime.

Cross-border identification

• Use of offshore structures: Establishing entities (eg, companies, trusts) in secret jurisdictions to conceal income, assets or ownership.
• Document fraud: Creating or altering financial documents, contracts or invoices to misrepresent the nature or terms of cross-border transactions.
• Abuse of legal processes: Misusing bankruptcy, liquidation or corporate dissolution procedures to evade tax liabilities and frustrate enforcement actions.

Tax Avoidance

This refers to taxpayer(s) seeking to reduce, exempt, or postpone the payment of taxes by establishing shell companies or making other legal arrangements that have no real business purpose.

Cross-border identification

• Avoiding the definition of a PE: Because ancillary or preparatory business activities are not considered PEs, the OECD Model Tax Guidelines unknowingly leave a lacuna in the law that digital companies can utilise to avoid taxes. Furthermore, the OECD Model Tax Guidelines require a PE to possess three characteristics: physical location, relatively long duration, and substantial economic activity. However, in the digital era, companies can operate without a physical location.
• TP of intangible assets: Digital enterprises, due to the very nature of their work, rely heavily on their intangible assets, which are characterised by their high liquidity. For example, companies can register their core intellectual property (“IP”) in jurisdictions that impose lower taxes, without having to move research and development personnel or physical equipment there.
• Thin capitalisation: Dividend expenses generated from equity financing are not deductible before tax, while interest expenses from debt financing are tax-deductible. Therefore, companies often increase the debt ratio between subsidiaries and the parent company to inflate interest expenses.
• Use of tax havens: Typical tax havens worldwide include the Cayman Islands, Bermuda, etc. Some of these areas have adopted complete tax exemption policies, meaning they exempt companies from paying CIT, instead implementing a minimal financial burden mechanism based on registration and administrative fees.

China endows its tax authorities with extensive powers for tax reassessment, including audits, penalties, and special tax adjustments. To effectively address cross-border tax fraud, evasion and avoidance, China actively expands its international governance network by negotiating bilateral treaties and participating in multilateral initiatives, thereby gaining access to broader intelligence and enforcement authority.

Legal Consequences

Upon identifying fraudulent, evasive or avoidant activities through audits or other means, tax authorities will initiate enforcement procedures, which may result in the following (among other things):

• Administrative penalties – The authorities will recover unpaid taxes and impose late payment interest (0.05% per day). Additionally, a fine ranging from 50% to five times the amount of tax evaded may be levied.
• Criminal liability – If the act constitutes a criminal violation, criminal proceedings will be initiated. Penalties can be severe, with the maximum penalty for serious cases of tax fraud being life imprisonment.

Tools Against Tax Base Erosion and Profit Shifting (“BEPS”)

For transactions that, while not directly illegal, erode the tax base by lacking commercial substance, the tax authorities employ specific anti-avoidance measures, the core components of which include:

• TP adjustments – If a business transaction between an enterprise and its related parties does not comply with the arm’s length principle, or if the enterprise implements other arrangements that do not have a reasonable commercial purpose, the tax authorities have the right to make a tax adjustment within ten years from the tax year in which the transaction occurred.
• Controlled foreign corporation (“CFC”) – Foreign-sourced profits controlled by domestic residents who retain such profits without reasonable business needs may be taxed as if the funds were distributed.
• Thin capitalisation rules – When the ratio of debt investment to equity investment received from an enterprise’s related parties exceeds the prescribed standard (generally 5:1 for financial enterprises or 2:1 for other enterprises), interest expenses are no longer deductible before tax.
• General Anti-Avoidance Rule (“GAAR”) – When determining whether an arrangement offers a tax benefit, the tax authorities should consider the economic substance of the arrangement, its outcome, and its impact on the enterprise, and compare it with alternative arrangements that achieve the same business objective without avoiding tax. When an enterprise and its related parties use agency or proxy arrangements to conceal related-party transactions, the tax authorities can determine related-party transactions based on economic substance.

International Tax Co-Operation

China actively strengthens its tax administration through deep engagement in the international tax governance system, primarily via three interconnected channels – expanding its treaty network, enforcing transparency standards, and implementing evolving global rules.

• Expanding DTAs network: China has built one of the world’s most extensive DTA networks, with over 100 comprehensive agreements in force. Modern treaties are increasingly equipped with robust anti-abuse provisions to prevent treaty shopping and improper claims of benefits.
• Automating tax information exchange: As a committed early adopter, China has fully implemented the Common Reporting Standard (“CRS”) for the automatic exchange of financial account information since 2018. It now engages in automatic information exchange with more than 100 jurisdictions, significantly enhancing transparency and its capability to detect offshore tax evasion.
• Implementing evolving international standards: China is an active participant in the G20/OECD BEPS Project and is integrating its outcomes into domestic practice. Key implementation areas include:
1. TP documentation – adopting the three-tiered standardised approach (master file, local file, and country-by-country report);
2. addressing the digital economy – engaging in Two-Pillar Solution negotiations to reform the international tax architecture for the digitalised age; and
3. dispute resolution – enhancing mechanisms for the mutual agreement procedure (“MAP”) to resolve cross-border tax disputes efficiently.

China has not adopted a unilateral list of non-cooperative tax jurisdictions. However, in line with global efforts against BEPS, it actively monitors and scrutinises transactions involving high-risk jurisdictions, particularly those characterised as offshore financial centres or low-tax territories, to safeguard its tax base.

China has established a comprehensive reporting regulatory regime to ensure tax compliance in cross-border activities, imposing specific reporting and disclosure obligations on taxpayers, financial institutions, and other intermediaries. The core pillars of this framework are outlined below.

• Related-party reporting: China has established a reporting obligation system covering taxpayers, financial institutions and other relevant entities. Enterprises with cross-border related party transactions must submit a “Report Form on Related Party Transactions” with their annual CIT settlement, disclosing the transaction parties, amounts and pricing methods. Eligible enterprises must also prepare three sets of TP documents, the main entity document, local documents, and special matters documents to prove their compliance.
• Treaty benefit claims: Non-resident taxpayers seeking to apply preferential withholding tax rates under a DTA must file the requisite forms (eg, Non-Resident Taxpayer’s Claim for Treaty Benefits) with the tax authorities for reporting or advance ruling.
• Outbound payment filing: Domestic enterprises making overseas payments (over USD50,000 per time) for service fees, dividends, interest, royalties, etc, are required to complete a tax filing (record filing or tax clearance) for such outbound remittances.
• E-commerce platform reporting: Under the Regulations on Tax Information Reporting by Internet Platform Enterprises, cross-border e-commerce platforms must report the identity and transaction details of sellers on their platforms to the tax authorities every quarter, bearing legal responsibility for the accuracy of the information provided.
• CRS compliance: Chinese financial institutions are mandated to conduct due diligence on financial accounts held by non-residents and annually report the related account information to the State Taxation Administration by 31 May. China automatically exchanges this information with over 100 jurisdictions.

Chinese tax authorities are vested with extensive powers to ensure tax compliance, combat illegal activities (such as tax evasion and fraud), and monitor the fulfilment of obligations by taxpayers, withholding agents, and other relevant parties. These powers are exercised through domestic and cross-border inspections, which typically involve the examination of relevant transactions, accounts and documentation. The key investigative tools are as follows:

• Right to inspect documents – the right to access taxpayers’ and withholding agents’ books, accounting vouchers, statements, and other tax-related documents (including electronic documents), which may be copied and sealed; relevant information on overseas affiliated companies may be obtained through international information exchange.
• Right to conduct on-site inspections – to inspect taxable goods, commodities, or other property at taxpayers’ production and business centres; to verify on-site evidence of cross-border transactions, including goods transportation, warehousing and customs declaration.
• Right to enquire – to ask taxpayers and withholding agents about issues and circumstances related to tax payment or withholding and collection of taxes, and to prepare written records of the enquiry.
• Account enquiry rights – with the approval of the director of the tax bureau (branch) at the county level or above, individuals and authorised entities may enquire about the account information of taxpayers and withholding agents in banks or other financial institutions; enquiries about the savings deposits of suspected person(s) require approval from the director of the tax bureau at the city prefecture-level or autonomous prefecture level or above.
• Right to inspect electronic data – this includes the right to inspect taxpayers’ electronic information systems and to use technical means to extract and copy electronic data (but not to damage the original data or affect the operation of the system).
• Right to conduct cross-regional investigations – this embodies the right to carry out cross-regional investigations and collect evidence through the co-operation of tax authorities in different regions.
• Preservation and enforcement rights – tax preservation measures (such as freezing deposits and seizing property) can be taken against taxpayers suspected of evading tax obligations, and enforcement measures (such as auctioning property to offset tax payments) can be taken against those who fail to pay taxes on time.

Legal Framework and Main Penalties

The PRC Tax Collection and Administration Law and its regulations are used to address most tax-related violations, and core penalties include:

• For tax evasion (such as concealing cross-border income) – the tax authorities may recover the tax owed, impose late-payment fees, and impose a fine of up to five times the amount of tax not paid (Article 63).
• For tax fraud (such as fraudulently obtaining export tax refunds) – fraudulently obtained tax may be recovered, and a fine ranging from 100% to 500% of the fraudulent amount may be charged (Article 66).
• For failure to fulfil withholding obligations (such as failure to withhold tax when paying overseas dividends) – the withholding agent may be fined between 50% and 300% of the non-withheld tax amount (Article 69).
• For those who evade, refuse or otherwise obstruct the tax authorities’ inspections (such as refusing to provide cross-border information) – they may be ordered to rectify the situation and may be fined up to RMB10,000; in serious cases, they may be fined between RMB10,000 and RMB50,000 (Article 70).

The Implementing Agency

The power to impose penalties is exercised by multiple administrative departments, such as the following:

• Tax authorities – The STA and its subordinate tax authorities are responsible for investigating and punishing tax evasion, tax fraud and other tax-related violations. For enforcement actions that exceed their statutory administrative powers (eg, compulsory enforcement against property), they must apply to the people’s courts for execution.
• Customs – The General Administration of Customs and its subordinate customs offices at all levels are responsible for investigating and punishing smuggling, violations of customs supervision regulations, and other similar activities.
• Co-ordinating regulatory departments – Other financial and regulatory agencies, including local commerce departments, branches of the People’s Bank of China, financial regulatory bureaus, and the State Administration of Foreign Exchange, play a supporting role. They are tasked with strengthening monitoring, facilitating information sharing, and promoting regulatory co-ordination to combat tax-related offences that involve cross-border capital flows or complex financial arrangements.

In China, most criminal penalties for tax fraud and tax evasion are described in the Criminal Law of the People’s Republic of China (“Criminal Law”).

Tax Fraud

Fraudulently obtaining export tax refunds constitutes a serious offence that undermines national fiscal revenue and is subject to severe legal consequences. The penalties for such acts are set out in Article 204 of the Criminal Law, summarised as follows:

• If the amount involved is large, the perpetrator(s) will be sentenced to fixed-term imprisonment of no more than five years or criminal detention, and will also be fined no less than once, but not more than five times the amount defrauded.
• If the amount involved is huge, or if there are other serious circumstances, the perpetrators will be sentenced to fixed-term imprisonment of no less than five years, but not more than ten years and will also be fined no less than once, but not more than five times the amount defrauded.
• If the amount involved is especially huge, or if there are other especially serious circumstances, the perpetrators will be sentenced to fixed-term imprisonment of no less than ten years and up to life imprisonment, and will also be fined up to five times the amount defrauded or be sentenced to confiscation of property.

Related offence: issuing false invoices

Under Article 205 of the Criminal Law, penalties for issuing false invoices are specified as follows:

• Whoever generates false VAT invoices or any other invoices to defraud a tax refund for exports or to offset tax money, will be sentenced to prison for a maximum of three years, or criminal detention, and will also be fined at least RMB20,000, but not more than RMB200,000.
• If an egregious amount of money is involved or if there are other serious circumstances, the perpetrator will be sentenced to fixed-term imprisonment of at least three years but not more than ten years, and will also be fined at least RMB50,000, but not more than RMB500,000.
• If the amount of money involved is huge, or if there are other especially serious circumstances, the perpetrator will be sentenced to fixed-term imprisonment of at least ten years, or life imprisonment, and will also be fined at least RMB50,000, but not more than RMB500,000 or be sentenced to confiscation of property.

Tax Evasion

According to Article 201 of the Criminal Law, if a taxpayer or withholding agent evades payment of tax through deception or concealment such as false declarations or failure to declare, the following penalties will apply:

• Anyone who evades a substantial amount of tax, exceeding 10% of the tax payable and over RMB10,000 but under RMB100,000, or who commits tax evasion again, after having been twice subjected to administrative sanctions by the tax authorities for tax evasion, will be sentenced to imprisonment for up to three years or detention, and will also be fined.
• Anyone who evades a huge amount of tax, exceeding 30% of the tax payable and over RMB100,000, will be sentenced to prison for three to seven years, and will also be fined.

Exemption from criminal liability

If, before the public security authorities file a case, the taxpayer has paid the outstanding taxes and delinquent payment fees and accepted administrative penalties after the tax authorities have issued a notice of tax recovery in accordance with the law, no criminal liability will be pursued. However, this does not apply to those who have been criminally punished for tax evasion or have been given more than two penalties by the tax authorities within the past five years.

According to Chinese law and the division of powers, general tax-related violations are punished by the tax authorities, while tax-related crimes are handled by the judicial system. If the tax authorities determine that a tax-related violation also constitutes a crime, they should transfer the case to the public security authorities.

Legal Basis for Case Transfer

The transfer mechanism is grounded in the following key provisions:

• Article 77 of the PRC Tax Collection and Administration Law stipulates that a tax authority will transfer all cases involving a tax offence suspected of constituting a crime to the judicial system for criminal prosecution.
• Article 3 of the Regulations on the Transfer of Suspected Criminal Cases by Administrative Law Enforcement Agencies stipulates that if an administrative law enforcement agency suspects the commission of a crime when investigating illegal acts, it must transfer the case to a public security organ.
• Article 48 of the Regulations on the Procedures for Handling Tax Inspection Cases stipulates that for tax violations suspected of constituting a crime, the inspection bureau will, after approval by the director of the tax bureau, transfer the case to the public security organ along with supporting evidence.

Administrative-Judicial Co-Ordination Mechanism

Currently, tax and judicial authorities primarily communicate through the “normalised collaboration mechanism”, which ensures the dual connection between administrative law enforcement and criminal proceedings.

Regarding the connection of legal procedures, existing regulations have already introduced some policies to standardise the process. For example, according to the Regulations on the Transfer of Suspected Criminal Cases by Administrative Law Enforcement Agencies, the principal leading official or the leading official in charge of the work of an administrative organ for law enforcement must plan and decide on whether to approve the transfer or not within three days of receipt of the report. Should they decide to approve the transfer, they must transfer the case to the public security organ within 24 hours; if they decide not to approve the transfer, they must record the reason in the file.

However, at the same time, there are still certain conflicts and ambiguities among the current administrative laws, regulations, rules, and normative documents. In practice, there are situations where tax authorities impose administrative penalties first and then transfer the case to the public security organs, and there are also situations where the case is transferred to the public security organs before tax administrative penalties have been imposed.

Comprehensive Collaboration Framework

A multi-layered co-ordination system has been established, comprising the following:

• Joint consultation mechanisms– Local governments have instituted regular joint meetings involving tax authorities, public security bureaus, procuratorates and the courts to address complex issues such as legal characterisation of major or novel cases (including cross-border matters) and evidentiary standards.
• Information sharing and joint enforcement– The authorities exchange data through dedicated information platforms and conduct co-ordinated investigations and evidence collection for major cases, enhancing enforcement effectiveness.
• Oversight and accountability– Higher-level authorities supervise compliance with transfer obligations, preventing failures to transfer, the substitution of administrative fines for criminal penalties, and the obstruction of inter-agency co-ordination.

In China, the legal basis for international tax co-operation is grounded in domestic laws, international treaty standards and bilateral agreements.

Domestic Law: the Legal Framework for Operational Procedures

• Both the PRC CIT Law and PRC Tax Collection and Administration Law stipulate that if a cross-border tax treaty or agreement between the PRC and a foreign country contains provisions different from those of domestic law, the provisions of the international treaty or agreement will prevail.
• The Administrative Measures of Special Tax Investigation and Adjustment and Mutual Agreement Procedure,which are enacted in accordance with the PRC CIT Law and the PRC Tax Collection and Administration Law, reconcile domestic tax law with international treaty obligations, by incorporating protocols such as MAP, to ensure that both frameworks work together cohesively for cross-border tax.
• The Notice of the State Administration of Taxation on Issuing the Rules for the International Exchange of Tax Informationsets forth the administrative procedures governing tax information exchange between China and other jurisdictions.

International Treaties: the Legal Backbone of Multilateral Co-Ooperation

• OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters: China first signed the convention in 2013, and as the world’s most comprehensive instrument for international tax co-operation, the convention provides China with a robust multilateral legal framework on which to exchange tax information with more than 100 contracting parties.
• MLI: Serving as a comprehensive package of multilateral BEPS countermeasures, the MLI modernises China’s bilateral tax treaty network by incorporating updated provisions on anti-treaty abuse and international dispute resolution.
• DTAs: China has signed DTAs with more than 100 countries and regions; these agreements not only prevent evasion of taxes and double taxation, but their information exchange provisions (usually referencing OECD or UN model agreements) also serve as the legal foundation for tax authorities in requesting and providing sensitive tax information.

China is a participant in the CRS and thus in automatic information exchange. China regularly and automatically exchanges cross-border financial account information with other signatories from over 100 jurisdictions to effectively prevent cross-border tax evasion.

In addition to MAPs and advance pricing agreements (APAs), China actively participates in other important multilateral co-operation arrangements, especially in the Belt and Road Initiative Tax Administration Cooperation Mechanism (BRITACOM), which was initiated and is led by the State Taxation Administration of China. Established in April 2019, this mechanism is an official, non-profit multilateral tax co-operation platform aimed at strengthening cross-border tax co-operation among countries and regions along the Belt and Road Initiative through “consultation, joint construction, and shared benefits”, optimising the business environment and promoting trade facilitation.

Currently, China has not formally joined the OECD’s International Compliance Assurance Programme (ICAP) nor implemented joint and simultaneous tax audits.

China has established and is operating a MAP programme. The legal framework of this programme consists of domestic law and international treaties.

MAPs specifically address double taxation resulting from TP adjustments in related-party transactions, such as unreasonable increases or decreases in profit distribution by foreign tax authorities leading to excessively high income tax rates. The programme’s legal basis includes DTAs, China’s Measures for the Administration of Adjustments under Special Tax Investigation and Mutual Consultation Procedures, and the OECD TP Guidelines. At its core, it is based on the arm’s length principle and the rule of “taxing profits where value is created”, correcting improper profit distribution.

According to the Announcement on Issuing the Implementation Measures for the Mutual Agreement Procedure of Tax Treaties, when an applicant submits a mutual consultation application in accordance with the provisions of this chapter, the application must be submitted within the time limit stipulated in the DTA.

Most tax treaties give applicants three years from the date of the first time they were aware of the non-compliant tax measures. However, some DTAs have a time limit of less than three years, such as the one-year period stipulated in the DTA between China and Turkey.

China has adopted mandatory binding arbitration on account of multilateral legal instruments such as the BEPS Multilateral Convention. MAPs remain China’s preferred method for resolving cross-border tax disputes. The main issues with these lie in their strict prerequisites, overt dependence on bilateral tax treaties, and the fact that a third-party arbitration tribunal is the final decision-making power over the country itself. Therefore, their application in practice is very limited and far from being universal.

China began using APAs on a trial basis in the late 1990s. After 2009, China’s APA programme rapidly developed throughout the early 2010s and reached maturity in 2016.

Key Regulatory Milestones

• In 2016, the STA issued the Announcement of the State Taxation Administration on Matters Regarding Enhancing the Administration of Advance Pricing Arrangements, which implemented successful provisions from the BEPS project and streamlined the APA workflow.
• In 2017, the STA issued the Announcement of the State Taxation Administration on Issuing the Administrative Measures for Special Tax Adjustment and Investigation and Mutual Agreement Procedures in order to incorporate measures recommended by Action 14 of BEPS, which requires participating jurisdictions to increase their efficiency in resolving MAP disputes.
• In July 2021, the Announcement of the State Taxation Administration on Matters Regarding Application of the Simplified Procedures for Unilateral Advance Pricing Arrangements was released to help taxpayers obtain tax certainty on transfer pricing arrangements through the application assessment, negotiation and signing, and monitoring and implementation stages.

In addition to the APA, Mainland China also employs an “Advance Tax Ruling” system, and together, these constitute a multi-faceted mechanism to ensure certainty in international tax matters.

"Advance Tax Ruling" refers to a service provided by tax authorities that is meant to increase tax certainty and mutual trust between tax authorities and enterprises. For example, when a company submits an enquiry asking for clarification on the applicable tax laws and regulations for a specific and complex tax matter, the tax authorities provide written guidance based on current tax laws and regulations.

Although there are currently no national-level regulations governing advance tax rulings, in recent years, many local tax authorities have experimented with providing personalised services for large enterprises. Consequently, many companies have applied for advance tax rulings on international tax matters (such as the application of DTA treatments).