Taxation of sponsorship agreements in China - the rules for International Sports Federations without permanent establishmentGuo Cai
It is not uncommon nowadays to spot Chinese companies' profiles at international sports events such as the 2018 FIFA World Cup and Pyeongchang Winter Olympics. Alibaba Cloud tied the knot with the International Olympic Committee confirming its Olympics Partner (TOP) status, and Alipay marched into the UEFA national men's competitions not only aiming for Chinese fans travelling to Europe for UEFA Games, but also carrying the ambition to "build awareness of Alipay's brand worldwide before a potential expansion beyond its home market".1 Chinese companies are riding the trend to sponsor international sports events in exchange for greater international impact. Such sponsorship deals will usually generate income derived from Mainland China (hereinafter referred to as “China”).
The author of this article has been receiving enquiries from international sports organizations and federations (IFs) regarding relevant tax obligations for IFs without permanent establishments in China. This article is intended to clarify these questions. For the purpose of this article, “permanent establishments” refers to a fixed place of business through which the business of an enterprise is wholly or partly carried on.2
When IFs without permanent establishments in China strike a sponsorship deal with Chinese companies who make payments of sponsorship fees from China, there are three types of tax usually involved under the laws of the People’s Republic of China (PRC Law):
Enterprise Income Tax;
Value-added Tax (VAT); and
Urban Construction Tax and Educational Surcharges.
For the avoidance of disputes over sponsorship fees receivable, we usually advise the IFs and sponsoring companies to agree on the amount of sponsorship fees in cleared funds (Sponsorship Fees) and thus to include gross-up clauses, with separate, express reference to tax payment obligations.
The tax under PRC Law derived from such Sponsorship Fees = Enterprise Income Tax (Sponsorship Fees × 10%) + VAT (Sponsorship Fees × 6%) + Urban Construction Tax and Educational Surcharges (approximately VAT × 12%).
Payment of the above tax should be made by the Chinese sponsoring companies as withholding agent on behalf of the IFs.
Enterprise Income Tax
Under PRC Law, an IF without a permanent establishment in China is considered as a “Non-resident Enterprise". When signing a sponsorship contract with a Chinese company, such Non-Resident enterprise is obligated to pay Enterprise Income Tax on its income derived from China.3 Though the tax rate of 20% applies to income of Non-resident Enterprise originating in China,4 according to Article 27, Paragraph 5 of the PRC Enterprise Income Tax Law and Article 91 of the Implementation Regulations of The PRC Enterprise Income Tax Law, the tax rate applicable to the Sponsorship Fees received by IFs from Chinese companies could be reduced to 10%.5 The Sponsorship Fees will be the taxable income. Therefore, IFs without a permanent establishment in China are required to pay Enterprise Income Tax based on the Sponsorship Fees collected from Chinese companies according to the following formula:
Non-resident Enterprise Income Tax = Sponsorship Fees × 10%.
Payment of such Non-resident Enterprise Income Tax to the Chinese tax authorities should be made by the Chinese sponsoring companies as withholding agents.6
Finally, the Enterprise Income Tax implications for IFs without a permanent establishment in China may vary if the contracting IF is tax resident in a country that has entered into a double tax treaty with the People’s Republic of China. Each case must be individually considered in light of the relevant double tax treaty provisions.
Value Added Tax
The nature of a sponsorship deal, in a nutshell, could be summarized as an intangible assets sales process - the sale of sponsorship rights by events rights holders (in this case, IFs) to Chinese companies, who in consideration, receive exposure and marketing opportunities. Therefore, where relevant Chinese sponsors obtain a benefit from the Sponsorship Fees paid, according to the Provisional Regulations on Value-Added Tax of the People's Republic of China, IFs should pay VAT at rate of 6% to the Chinese tax authorities on its sales amount.7
The amount of Sponsorship Fees agreed in a sponsorship contract between an IF and a Chinese company is the sales amount. As a result, under Provisional Regulations on Value-Added Tax of the People's Republic of China, IFs without permanent establishments or agents in China are obligated to pay VAT = Sponsorship Fees × 6%. The payment of VAT to the Chinese tax authorities should be made by the sponsoring company as the withholding agent when the Sponsorship Fees are paid to the sponsored IF.8 After the sponsoring company completes the payment, it can obtain a Withholding Tax Payment Certificate. This payment can be used as an input tax payment to be deducted from the output tax payable by the company.9
Urban Maintenance and Construction Tax (referred to as “Urban Construction Tax”) and Educational Surcharges
In addition to the two major categories of Enterprise Income Tax and VAT, IFs are also obligated to pay Urban Construction Tax and Educational Surcharges under the tax regime of China.10 Similar to Enterprise Income Tax and VAT, Urban Construction Tax and Educational Surcharges should also be paid by Chinese sponsoring companies as withholding agents.11
Urban Construction Tax = actual amount of VAT paid × 7% (if the sponsoring company is resident in an urban area of People’s Republic of China);
Education Surcharges = actual amount of VAT paid × 5%.
This article is for general knowledge management and sharing, which does not constitute any legal opinion. Should you have further questions either in relation to this article or any specific issue, please contact the author / attorney listed below:
The author wishes to thank Mr.Libin Wu, M&T Lawyers, for helpful comments
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- Tags: Agreements | China | Commercial | Contract | Enterprise Income Tax | Football | Olympics | Sponsorship | Tax | UEFA | Urban Construction Tax and Educational Supercharges | Urban Construction Tax and Educational Surcharges | Value-added Tax (VAT)
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About the Author
Attorney, Jin Mao Law Firm
Ms. Guo Cai oversees the LexVeritas Sports and International Law Group, Jin Mao Law Firm (People's Republic of China), the first Chinese law firm to have a practice group dedicated to the sports industry. Ms. Cai graduated from Harvard Law School and China University of Political Science and Law. She also held an LLM in Human Rights (distinction) from the University of Hong Kong. Admitted to practice in China and the US (New York), Ms. Cai specialises in international dispute resolution and sports law, growing with the Chinese sports industry and connecting international best practice with sports in China.