In the structure of Chinese parent company → Singapore company → Japanese subsidiary, the tax treatment in the manufacturing industry involves multiple types of taxes. This cross-border structure not only involves multiple jurisdictions but also needs to consider tax treaties and transfer pricing rules between countries. The following are the main types of taxes that each company needs to pay at different stages, as well as which taxes are exempt. This article will list the types of taxes involved for the Chinese parent company, Singapore company, and Japanese subsidiary separately, and provide more detailed explanations.

1.Chinese Parent Company

1.1 Taxes to be paid

Corporate Income Tax (CIT): 25% (applicable rate when receiving overseas dividends, but foreign tax credits can be used to offset taxes paid abroad).

China’s Corporate Income Tax Law stipulates that resident enterprises should pay corporate income tax on their income sourced from both within and outside China.

For dividend income received from Singapore subsidiaries, Chinese parent companies can apply for foreign tax credits to avoid double taxation.

It should be noted that the credit limit is calculated based on the ratio of the tax payable under Chinese tax law and the proportion of foreign income to total income.

 Value-Added Tax (VAT): Applicable to companies selling domestic products and services, with a VAT rate of 13% (specific rates vary depending on the category of goods sold).

The manufacturing industry usually applies a 13% VAT rate, but certain specific goods may be subject to 9% or 6% rates.

Exported goods are usually subject to the “exempt, credit, and refund” tax policy, with refund rates varying by product type.

Companies need to file VAT returns monthly or quarterly and can use input tax to offset output tax.

Individual Income Tax: For company employees, paid according to the individual income tax rates stipulated by Chinese tax law.

Wages and salaries are subject to progressive tax rates ranging from 3% to 45%.

The company, as a withholding agent, needs to withhold and pay individual income tax for employees.

For employees dispatched to Singapore or Japan, the relevant provisions of double taxation avoidance agreements need to be considered.

1.2 Exempt Taxes

Dividend Withholding Tax: Dividends received from Singapore do not need to pay withholding tax, but corporate income tax needs to be paid when receiving dividends.

This is because China adopts the direct credit method for profits distributed by overseas subsidiaries, i.e., the withholding tax paid overseas is directly credited against the Chinese corporate income tax payable.

2.Singapore Company

2.1 Taxes to be paid

Corporate Income Tax (CIT): Singapore’s corporate income tax rate is 17%. However, if the Singapore company receives dividends from overseas (Japan) that have already been taxed in Japan, the Singapore company can usually be exempted from taxation on the dividends.

Singapore implements a single-tier tax system, where profits that have already paid corporate income tax are distributed to shareholders without further income tax.

Singapore offers tax incentives for newly established companies that meet certain conditions, such as tax exemption on the first S$100,000 of taxable income for the first three years, and half taxation on the next S$200,000.

For dividends from Japanese subsidiaries, if specific conditions are met (such as shareholding ratio, proof of tax paid, etc.), foreign dividend exemption can be applied for.

Goods and Services Tax (GST): Singapore’s value-added tax, with a standard rate of 8%. Applicable to goods and services sold in Singapore.

Companies with annual turnover exceeding S$1 million must register for GST.

Exported goods and international services are usually zero-rated.

GST-registered businesses can claim input tax credits.

2.2 Exempt Taxes

Dividend Withholding Tax: When the Singapore company pays dividends to the Chinese parent company, no withholding tax needs to be paid.

This is a major advantage of Singapore’s tax system, beneficial for attracting foreign investment.

Dividend Income Tax: Dividends received by Singapore companies from Japan are usually exempt from corporate income tax (if the Japanese subsidiary has paid local taxes and meets Singapore’s tax exemption policy).

This policy aims to avoid double taxation, but companies need to meet specific conditions to enjoy this benefit.

3.Japanese Subsidiary

3.1 Taxes to be paid

Corporate Tax: Japan’s corporate tax rate is 23.2% (national tax). In addition, local corporate tax (national tax), corporate inhabitant tax (local tax), and corporate business tax (local tax) need to be paid. The combined effective tax rate is approximately 29.74%.

Corporate Tax (National Tax): 23.2%

Local Corporate Tax (National Tax): 10.3% of the corporate tax amount

Corporate Inhabitant Tax (Local Tax): Standard rate is 12.9% of the corporate tax amount (specific rates vary by region)

Corporate Business Tax (Local Tax): Standard rate is 9.6% of income (specific rates vary by industry and scale)

Small and medium-sized enterprises may be subject to lower rates and special preferential policies

Consumption Tax: Japan’s consumption tax rate is 10% (8% national tax and 2% local consumption tax). Applicable to products and services sold by subsidiaries in Japan.

Businesses with annual sales exceeding 10 million yen must register as consumption tax payers

Exported goods and certain cross-border services are zero-rated

Consumption tax payers can claim input tax credits

Dividend Withholding Tax: When Japanese subsidiaries pay dividends to Singapore companies, according to the bilateral tax treaty between Japan and Singapore, the withholding tax rate is 5%.

If the Singapore company holds 25% or more shares of the Japanese subsidiary and has held them for more than 6 months, a preferential tax rate of 5% may apply

Otherwise, a general withholding tax rate of 15% applies

Companies need to provide relevant documents to prove their entitlement to the preferential rate

3.2 Exempt Taxes

Capital Gains Tax: Japan usually taxes capital gains of subsidiaries as ordinary income, without a separate capital gains tax.

Capital gains are included in the company’s ordinary income and taxed at the above-mentioned combined corporate tax rate

For real estate transfers, real estate acquisition tax and registration license tax may need to be paid

Summary

Chinese Parent Company: Corporate Income Tax (25%), can credit foreign taxes paid; Value-Added Tax; Employee Individual Income Tax.

Special attention needs to be paid to transfer pricing issues in cross-border transactions, establishing a sound contemporaneous documentation preparation mechanism.

Singapore Company: Corporate Income Tax (17%, but dividend income is tax-exempt); Goods and Services Tax (8%); No dividend withholding tax.

Can utilize Singapore’s tax incentives and extensive tax treaty network for tax planning.

Japanese Subsidiary: Corporate Tax and local taxes (combined effective rate about 29.74%); Consumption Tax (10%); Dividend Withholding Tax (5%).

Need to pay attention to Japan’s complex local tax system, different regions may have different rates and regulations.

This covers the main types of taxes that need to be paid by Chinese parent companies, Singapore holding companies, and Japanese subsidiaries in the manufacturing industry. If you have specific tax optimization or structural adjustment needs, further discussion on tax planning can be conducted. It should be noted that Japan’s tax system is relatively complex, and it is recommended to consult professional tax advisors for more detailed advice.

In addition, when conducting cross-border tax planning, the following points need to be considered:

Transfer Pricing: Ensure transactions between related enterprises comply with the arm’s length principle and prepare relevant documentation.

Permanent Establishment Risk: Assess whether a permanent establishment is constituted in each country and the resulting tax implications.

Anti-avoidance Rules: Understand and comply with each country’s anti-avoidance regulations, such as Controlled Foreign Company rules, thin capitalization rules, etc.

Tax Treaty Network: Fully utilize tax treaties between countries, reasonably arrange international business to reduce overall tax burden.

Economic Substance Requirements: Ensure subsidiaries in each country have sufficient economic substance to support their commercial presence in that country.

By comprehensively considering the above factors, manufacturing enterprises can optimize their international tax structure and improve overall tax efficiency on a legal and compliant basis.