China State Administration for Taxation (SAT) issued the Announcement on the Recognition of the “Beneficial Owner” in Tax Agreements on June 29,2012 and it took effect on July 1.The Announcement reduces the burden for determining beneficial owners. It states that, when it comes to passive income under international tax laws, the dividend should be the main form of passive income compared with other royalties and interest.

The Announcement fills in a loophole from Circular 601, which gave discretion to local authorities to determine whether the foreign company is the beneficial owner and did not detail the necessary documentation when applying for the reduced withholding tax rate.

Article 2 of the Announcement removes that uncertainty as it clearly specifies the required documentation requirements. It also allows both the authorities and applicants to invoke the lower withholding tax rate of as little as 5%, instead of 10%.

The preferential rate is dependent upon whether the country of residence of the beneficial owner has double tax agreements with China.