In the structure of Chinese Parent Company → Hong Kong Company → Japanese Subsidiary, the tax treatment in the e-commerce industry involves multiple tax types and jurisdictions. This multinational structure needs to consider tax policies of various regions, bilateral tax treaties, and transfer pricing rules. The following are the main taxes that each company needs to pay at different stages, and which taxes are exempt. This article will list the taxes involved for the Chinese parent company, Hong Kong 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 dividends from overseas, but foreign tax credit mechanism can be used to offset taxes paid abroad).

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

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

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

Value Added Tax (VAT): E-commerce platform services are usually subject to a 6% VAT rate.

VAT refund policy may apply to cross-border e-commerce retail exports.

Companies need to declare VAT monthly or quarterly, and can use input tax to offset output tax.

Zero-rate or exemption policies may apply to e-commerce services provided to overseas.

Individual Income Tax: For company employees, payable according to the individual income tax rate 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 Hong Kong or Japan, relevant provisions of double taxation avoidance agreements need to be considered.

1.2 Exempt Taxes

Dividend Withholding Tax: Dividends received from Hong Kong 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.Hong Kong Company

2.1 Taxes to be paid

Profits Tax: Hong Kong implements a territorial source principle of taxation, only taxing profits sourced from Hong Kong. The standard tax rate is 16.5%, with a preferential rate of 8.25% for the first HKD 2 million of qualified profits.

If the profits of the Hong Kong company mainly come from outside Hong Kong (such as dividends from Japanese subsidiaries), offshore exemption may be applicable.

Hong Kong exempts capital gains from tax, but careful distinction between capital gains and business profits is necessary.

Salaries Tax: For employees working in Hong Kong, the company needs to withhold and pay salaries tax for them. The tax rate is a progressive rate of 2%-17%.

Special tax calculation methods may apply to employees who only work in Hong Kong for part of the time.

2.2 Exempt Taxes

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

This is a major advantage of Hong Kong’s tax system, which is conducive to attracting foreign investment.

Dividend Income Tax: Dividends received by Hong Kong companies from Japan are usually exempt from profits tax.

This is in line with Hong Kong’s territorial source principle of taxation, as dividend income is usually considered offshore income.

3.Japanese Subsidiary

3.1 Taxes to be paid

Corporate Tax: The corporate tax rate in Japan is 23.2% (national tax). In addition, local corporate tax (national tax), corporate inhabitant tax (local tax), and corporate enterprise tax (local tax) need to be paid. The comprehensive effective tax rate is about 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 Enterprise 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% (of which 8% is national tax and 2% is 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

Zero rate applies to export goods and certain cross-border services

Consumption tax payers can apply for input tax credit

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

If the Hong Kong company holds more than 10% of the shares of the Japanese subsidiary and has held them for more than 6 months, a preferential rate of 5% may apply

Otherwise, a general withholding tax rate of 10% applies

Companies need to provide relevant documents to prove they are entitled 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 comprehensive corporate tax rate

Summary

Chinese Parent Company: Corporate Income Tax (25%), can offset taxes paid abroad; VAT (6%, special policies may apply); employee individual income tax.

Special attention needs to be paid to VAT treatment of cross-border e-commerce and related tax refund policies.

Transfer pricing issues in cross-border transactions need extra attention, and a sound contemporaneous documentation preparation mechanism should be established.

Hong Kong Company: Profits Tax (16.5%, preferential rates or offshore exemption may apply); Salaries Tax; no dividend withholding tax.

Hong Kong’s tax incentives and simple tax system can be utilized for tax planning.

Need to pay attention to distinguishing between offshore and onshore income, as well as the difference between capital gains and business profits.

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

Need to pay attention to Japan’s special tax regulations on cross-border e-commerce, including consumption tax collection and reporting requirements.

E-commerce companies may need to consider the risk of permanent establishment in Japan, especially when setting up warehouses or customer service centers.

This covers the main taxes that Chinese parent companies, Hong Kong holding companies, and Japanese subsidiaries in the e-commerce industry need to pay. When conducting cross-border tax planning, the following points also need to be considered:

Transfer Pricing: Ensure transactions between related enterprises comply with the arm’s length principle, especially in terms of cross-border service fees and royalties.

Permanent Establishment Risk: Assess whether a permanent establishment is constituted in various countries, especially facilities such as servers and warehouses that may be involved in e-commerce business.

Anti-tax Avoidance Rules: Understand and comply with anti-tax avoidance regulations in various countries, such as controlled foreign company rules, thin capitalization rules, etc.

Tax Treaty Network: Make full use of the tax treaties between China-Hong Kong-Japan to reasonably arrange international business and reduce overall tax burden.

Economic Substance Requirements: Ensure that the Hong Kong company has sufficient economic substance to support its commercial presence in the region and application for tax incentives.

Digital Tax: Closely monitor the latest policies of various countries on taxing the digital economy, such as the expansion of consumption tax collection scope in Japan.

By comprehensively considering the above factors, e-commerce enterprises can optimize their international tax structure and improve overall tax efficiency on a legal and compliant basis. It is recommended to consult professional tax advisors to obtain more detailed advice and ensure compliance with the latest tax regulations in various regions.