Shall branch Companies file separate Tax Returns?

First of all, it is important to define what exactly is a branch company.

“A company may establish a branch company. To establish a branch company, it shall apply to the company registration authority for registration and obtain a business license. A branch company shall not have legal personality and its civil liability shall be borne by the company.”[1]

This provision clarifies the attribution of civil liability to the branch company, i.e., the branch company cannot be independently liable for civil liability and the consequences of all its acts and responsibilities are borne by the parent company.

 

It is also necessary to emphasize that branch companies can use two different accounting methods, the first one being independent accounting and the second one non-independent accounting.

 

• What is the difference between independent and non-independent accounting for branch companies?

 

“Independent accounting” means that the branch company carries out a comprehensive and systematic accounting of its business operation process and its results separately. A separate accounting organization is set up and staffed with accounting personnel, and a complete accounting work organization system is in place.

 

“Non-independent accounting” refers to the accounting of branch companies that do not have a complete system of accounting vouchers and accounting books and only record part of their economic operations, with the full accounting task being performed by the head office.

 

As the branch company does not have a legal personality, it is reflected on the business license which has no registered capital and no legal representative.

 

• Taxation of Branch Companies

 

If a branch company uses the reporting system to the head office, you can simply set up a detailed ledger.

Many people are confused as to whether a branch company should file a separate tax return or be aggregated and filed by the head office.

 

Here is an analysis of the major tax types:

 

1. Value-Added Taxes (VAT)

 

VAT is generally declared locally, i.e. the branch office writes its invoices, credits and declares the tax.

 

Reference: Article 22 of the Provisional Regulations of the People’s Republic of China on Value-added Tax stipulates that fixed business operators shall file tax returns with the competent tax authorities where their establishments are located. If the head office and branch companies are not located in the same city, they shall file tax returns to the competent tax authorities of their respective locations. Therefore, the VAT of a branch company is generally declared and taxed locally.

 

2. Additional Taxes

 

Both the city tax and the surcharge are calculated and paid based on the actual turnover tax paid. VAT is taxed independently, so obviously, the city tax and surcharge are also taxed independently.

 

3. Corporate Income Tax (CIT)

 

Unless otherwise specified, branch companies are not required to remit CIT independently, but to pay CIT on a local basis. In the annual remittance, the head office aggregates the annual taxable income of the enterprise and deducts the prepaid tax of the head office and branch companies, and makes up for any excess or shortfall.

 

Reference: Article 2 of the Notice of the State Administration of Taxation on the Issuance of the Measures for the Collection and Administration of Enterprise Income Tax for Cross-regional Operation in an Aggregated Manner (State Administration of Taxation Notice No. 57 of 2012) stipulates that if a resident enterprise establishes a branch company within China across regions (meaning across provinces, autonomous regions, municipalities directly under the Central Government and cities under a separate plan, hereinafter the same) that does not have legal personality, the resident enterprise is a cross-regional operation in an aggregated manner. It means that unless otherwise specified, the management of its enterprise income tax levy shall be governed by these Measures (unified calculation, graded management, local prepayment, aggregated liquidation, and fiscal transfer).

 

4. Personal income tax

 

A branch company can be an independent withholding agent to declare and pay personal income tax. Generally, independent branches pay and remit their salaries, and it is of course best for the branch company that pays the salaries to withhold and declare personal tax independently.

 

Reference: Article 9 of the Individual Income Tax Law stipulates that individual income tax is payable by the person who earns the income and the unit or individual who pays the income is the withholding agent.

 

To conclude and summarize, in the vast majority of cases taxes should be filed and paid by branch companies separately and locally. If any adjustment should be made after consolidation, it will be done at the head office level.

 

Do not hesitate to contact us if you have any further inquiries.

 

[1] PRC Corporate Law – Article 14 (1)