As for some companies, sales commission may take up a substantial proportion of gross income. Generally speaking, sales commission can be deducted as selling expenses before tax. However, due to the complexity of transactions, not all sales commission can be deducted entirely. Hence companies shall comply with the law when deducting such expenses so as to avoid potential tax risks.
1. Payments to employee
A US foreign representative office asked us to review its tax planning proposals concerning sales commission previously. Its employees complained about their heavy tax burden on individual income tax and they asked the company to change part of their income into sales commission.
According to Circular Caishui  No. 29, sales commission is subject to intermediary service companies or individuals with certain qualifications. Therefore, sales commission can only be paid to an independent third party and any employee, agent or representative is strictly excluded. In addition, we also want to remind the company about the potential tax risks in tax planning. Without solid legal basis, tax planning can easily result in tax evasion and the company may suffer severe legal liabilities as a consequence.
2. Payments to individuals
Many companies are troubled by the problems of payments to individuals. Indeed payments to individuals for their intermediary services actually happen during business operation. However, such payments can only be deducted as sales commission when paying individuals with intermediary service qualifications. Hwuason Lawyers suggest company aware that payments to individuals without qualifications are subject to individual income tax under remuneration category. And the company is liable to withhold their individual income tax according to PRC Individual Income Tax Law.
In fact, there exist certain requirements for deduction of sales commission and company shall not claim such deduction at its own will. On the contrary, company shall submit adequate materials to the tax authority to support such deductions, like sales contract, sales commission agreement, payment receipts, invoices, etc.
3. Oversea sales commission payments
Oversea sales commission is quite common especially in international trade. When dealing with the deduction of oversea sales commission, company shall pay special attentions to the withholding tax of such payments. To be precise, if the foreign company or individual has no agent in China, the company is liable to withhold the business tax and corporate income tax or individual income tax according to the current tax law.
Since the total amount of sales commissions can add up to significant numbers as for some companies and the tax law imposes strict rules on the deduction of sales commission, Hwuason Lawyers suggest companies follow the rules to avoid the potential tax risks on deduction of sales commission.
For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (firstname.lastname@example.org) or Lingyan Hu (email@example.com). Or you can visit our website at www.hwuason.com.
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.