In the year following the entry into effect of the PRC Enterprise Income Tax Law, the Chinese tax authorities have issued several rules clarifying emphasizing the position on withholding tax on China-sourced income of non-resident enterprises. Recently, a new regulation was issued that sets out the procedural rules for withholding income tax, the Provisional Administrative Measures on Withholding Enterprise Income Tax for Non-resident Enterprises, Guoshuifa  No. 3.
In the past, it was not clear how and if to apply withholding tax in a share transfer between two non-resident enterprises involving a Chinese target company. The Measures now clarify that the transferor shall pay the withholding tax while the target company shall file the transaction contract with the tax authority. So, from now on, it is clear that the transferee is not responsible for withholding tax.
The Measures also detail the role of withholding agent where a Chinese party is a purchaser in a share acquisition. However, the Measures are clear that where the withholding agent fails to withhold tax, the transferor shall remain liable. Failure to pay tax by the transferor may result in a penalty.
In applying the effective withholding tax rate, any preferential treatment under the applicable tax treaty may be extended through application by the non-resident enterprise.