Document Type



Taxation-Federal | Taxation-Transnational | Tax Law


The desirability of doing business in any foreign country may turn on the ability to avoid double taxation. This issue is a serious concern for foreign countries. For example, in China authorities have expressed a willingness to pursue a treaty specifically removing the problem of double taxation regarding a proposed petroleum or mineral exploitation tax. However, without such a treaty, U.S. taxpayers will be left with an important question: Will the Chinese income taxes be creditable against their U.S. income taxes?

A U.S. foreign tax credit is generally allowed for foreign income taxes paid or accrued, or for foreign income taxes paid in lieu of income taxes. This credit is allowed to U.S. citizens, residents, and corporations for foreign income taxes levied directly on income. A U.S. corporation can also claim a credit for any income taxes levied on the income of a foreign corporation from which it receives dividends.

This article looks at two taxes that China imposes: The Individual Income Tax Law (IITL) and the Joint Venture Income Tax Law (JVITL). The IITL provides different tax treatment depending on whether you are a resident or nonresident, and the treatment of a resident depends on the length of the stay. The JVITL taxes joint ventures operating in China on their world-wide income derived from production, business, and other sources.

A Chinese income tax that is not creditable for the purposes of the U.S. foreign tax credit would tend to discourage United States investment. It is presumed that the Chinese expect that both the JVITL and the IITL will be creditable against any income tax levied by the U.S. on income from Chinese sources. The expectation seems justified with regard to the JVITL, but doubts exist regarding certain aspects of the IITL.

This article examines these Chinese taxes in more depth and whether they are income taxes under U.S. regulations, and subject to the U.S. foreign tax credit or whether they may still qualify for the credit as a tax paid in lieu of an income tax.