SEISEI INSIGHTS — Cross-border Compliance
The "Offshore Means Tax-Free" Misconception: Withholding Tax in China When No Treaty Applies
2026-07-07
"I set up a company in the BVI, so the rate is zero — a perfect structure." When it comes to holding assets through offshore entities, we hear this constantly. Jurisdictions like the BVI, the Cayman Islands, and Bermuda genuinely do not tax corporate profit itself. But the problem lies not where the profit arises — it lies at the moment funds leave China for abroad. And that moment is routinely overlooked.
The Problem Is on the Way Out
When paying a dividend out of China, you must first return to Chinese domestic law. There is no comprehensive tax treaty between China and the BVI — nor with the Cayman Islands, nor with Bermuda. Without a treaty there is no room for reduction, and the domestic rate applies as written.
At the corporate level, where a non-resident enterprise receives a China-source dividend, the withholding rate is 10% under Article 4 and Article 27(v) of the Enterprise Income Tax Law together with Article 91 of its Implementing Regulations. At the individual level, interest, dividends, and gains on the transfer of property are subject to a flat 20% rate under Article 3 of the Individual Income Tax Law.
| Dividend outflow path | Governing provision | Withholding rate |
|---|---|---|
| China → jurisdiction with no treaty (BVI, Cayman, etc.) | EIT Law Art. 4 & Art. 27(v); Implementing Regs Art. 91 | 10% |
| China → individual who is a Chinese tax resident | IIT Law Art. 3 | 20% |
| China → jurisdiction with a treaty | Dividend article of the applicable treaty | Reduced if conditions are met |
Routing through a jurisdiction that has concluded a treaty can bring the dividend withholding rate below the domestic level. The extent of the reduction depends on the specific treaty and whether its conditions are satisfied — but the mere presence or absence of a treaty can change the burden materially, and that is the starting point.
Receiving It Personally Does Not Solve It
Some reason: "Then let me skip the company and receive it personally from the offshore entity." But the fact that the jurisdiction does not tax is a separate question from whether you have a filing obligation in China. Article 1 of the Individual Income Tax Law defines as a resident individual anyone domiciled in China, or anyone without domicile who is present in China for 183 days or more in aggregate within a tax year; a resident individual is taxed on all income from both inside and outside China. As long as you are a Chinese tax resident, income received from an overseas entity is within the scope of your filing.
CRS: The Second Reality
Reporting that includes overseas assets is not a system that relies on voluntary disclosure alone. Under the Common Reporting Standard (CRS), China has automatically exchanged financial account information with numerous jurisdictions since 2018. The BVI was among the early participants in CRS, and the balances of accounts held there reach China's tax authorities without any action on the account holder's part. The assumption that "if I don't say, they won't know" no longer holds.
Treat It as a Structural Question
The offshore entity itself is not the problem. The problem is treating it as though it were shielded by a treaty. Before designing a structure, three things to confirm:
- Does the destination jurisdiction of the funds have a tax treaty with China?
- Is the recipient a Chinese tax resident? If an individual, worldwide income is within the scope of filing.
- Are the overseas accounts held within the scope of CRS information exchange?
Mapping the outflow path, the recipient, and information exchange onto a single structural diagram is the starting point for holding cross-border assets.
This article provides general information on tax systems and does not constitute individual tax consultation. Specific filings and computations are handled by licensed professionals in the relevant jurisdictions whom we introduce.