When a parent company receives dividends from a subsidiary, the accounting and tax treatment often don't match. This is especially relevant for groups where an overseas parent — such as an Italian shareholder — holds a subsidiary in China. Here is a plain language breakdown of how the accounting works, and how PRC tax rules shape the deferred tax picture.

It Starts With Ownership Percentage

Under PRC Accounting Standards for Business Enterprises, the accounting treatment of dividend income depends on how much of the subsidiary the parent owns.

Below 20% ownership, no significant influence — Fair value method. Dividends received are recorded as income when cash comes in.

20%–50% ownership — Equity method. The dividend is not treated as income. Instead, it reduces the value of the investment on the parent's books, because the parent already recognized its share of earnings when they were earned, not when they were distributed.

Above 50% ownership — Consolidation. The subsidiary's results are combined into the parent's own financial statements, so a dividend paid internally has no effect on the group's total income. The money simply moves from one pocket to another.

How PRC Tax Rules See It

This is where China's rules differ meaningfully from many other jurisdictions.

If both the paying subsidiary and the receiving parent are PRC resident enterprises, dividends between them are fully exempt from Enterprise Income Tax under Article 26 of the EIT Law — a complete exemption, not a partial deduction. In this domestic scenario, there is generally no deferred tax to worry about, because the dividend will never be taxed regardless of when it is paid out.

The picture changes once the parent is based overseas. When a China subsidiary distributes profits up to a foreign parent, such as an Italian holding company, the payment is subject to withholding tax. The standard domestic rate is 10%. Under the new China–Italy tax treaty, effective from 1 January 2026, this can be reduced to 5%, provided the Italian parent directly holds at least 25% of the China subsidiary's shares for a continuous 365-day period that includes the payment date. Groups that do not meet this holding threshold remain at the 10% rate.

Why This Creates a Deferred Tax Liability

Because withholding tax is only triggered on actual distribution — and applies to nearly the full amount eventually paid out — undistributed earnings of a China subsidiary represent a temporary difference at the consolidated level, not a permanent one. Under the equity method or consolidation, the parent has already booked its full share of the subsidiary's earnings. If those retained earnings are expected to be distributed at some point, a deferred tax liability should be recognized for the withholding tax that will eventually apply, unless management can assert the profits will be reinvested in China indefinitely.

The Takeaway

Unlike jurisdictions with a partial dividends received deduction, China's rules create a clean split. Purely domestic dividends between PRC resident enterprises carry no deferred tax at all. Cross-border dividends to an overseas parent almost always do, because withholding tax follows the money out rather than exempting it.

For groups with a China subsidiary and an overseas parent, confirming the shareholding period, the applicable treaty rate, and management's actual distribution intentions is essential to getting the deferred tax provision right. Please reach out to us to review the specifics of your structure.