Answer: In accordance with Articles 3 and 37 of the Enterprise Income Tax Law of the People’s Republic of China, a non-resident enterprise that has no establishment or place in China, or has an establishment or a place in China but the income derived is not effectively connected with the aforesaid establishment or place, shall pay enterprise income tax on the portion of its income sourced from inside China. Under this situation, the tax shall be withheld at source, with the payer of the income serving as the withholding agent. When making such payment or when such payment is due, the withholding agent shall withhold the income tax from such payment.

In accordance with Article 38 of the Enterprise Income Tax Law of the People’s Republic of China and Article 106 of the Regulations on the Implementation of the Enterprise Income Tax Law of the People’s Republic of China, with respect to the tax payable on income derived by a non-resident enterprise from contractor projects and services in China, the tax authority may designate the payer of the project fee or the service charge as the withholding agent and concurrently informed the withholding agent of the basis and method for calculating the tax to be withheld, as well as the time limit and method for withholding.The situations under which a withholding agent may be designated include:

(1) where the anticipated period for project operation or the period for service provision is less than a tax year and there is evidence to show that the obligation to pay tax is not fulfilled;

(2) where the formalities for tax registration or temporary tax registration have not been completed, and no agent in China is entrusted to fulfil the obligation to pay tax; and

(3) where tax returns or prepaid tax returns for enterprise income tax have not been filed within the prescribed time limit.

The main difference between source withholding and designated withholding lies in that the withholding obligation under the former situation does not require designation by the tax authorities, while the withholding obligation under the latter necessitates designation by the tax authorities.

Source: State Taxation Administration

https://www.chinatax.gov.cn/chinatax/c102449/c5235007/content.html