In recent years, Chinese shipping companies and their lawyers have been scrounging for information about a new tax system that is being rushed out. Under the new regulation, which covers charterers, shipowners, brokers and agents, non-resident companies engaged in international maritime business will be subject to an income tax of up to 25 per cent.

As a Guangzhou-based lawyer at Wang Jing & Co explained to the FT, most foreign shipowners are required to pay only 10 per cent of their net rental income as income tax. However, foreign shipowners with representative offices of foreign institutions in China shall be subject to the full tax rate of 25%.

If the shipowner fails to accurately calculate and declare his taxable income according to the facts, the following formula shall be adopted: taxable income = total income × approved rate of profit. Among them, the approved rate of profit shall be assessed and determined by the relevant institutions, and shall not be less than 15%.

The new rules came into effect on August 1, just one month after they were published. As a result, many shipowners who currently operate ships in China, or have ships sailing to China, may remain "in the dark" and completely unaware of the relevant tax liabilities they have incurred.

In fact, even Chinese lawyers haven't had time to pore over the terms or ask government agencies how to interpret and enforce them. In addition, a number of points in the approach have not been clarified to date.

The most obvious and immediate impact of the policy will be on non-Chinese shipowners who do business with Chinese charters and shippers.

As for Chinese shipowners, they are not affected because they pay value added tax (VAT) when dealing with domestic customers.

In addition, it is yet to be further explained by the Tax administration whether non-Chinese shipowners who ship goods to China for overseas customers will be affected.

The new regulation has not only brought uncertainty to the industry, but also increased transaction costs for the companies involved. In addition, in a disguised way, it puts the responsibility of collecting taxes into the hands of the charterer or the "withholding agent" designated by the shipowner (which may be the shipping agent, freight forwarder, etc.). The latter must withhold a certain percentage of their income for this purpose and remit it to the tax office upon receipt of the tax receipt.

Chen Xiangyong, a lawyer at Jinghai Law firm, said, "The first problem arising from the new rules is that Chinese charterers will most likely require foreign owners to pay certain additional fees as withholding taxes when dealing with them."

Chen and his colleagues have specifically warned about the issue in a note posted on the bourse website. Since then, they say, they have been bombarded with calls from shipowners, protection and indemnity associations and lawyers from other law firms.

Last week Trading Wind asked a number of ship brokers and owners how to interpret the new tax, but most of them said they were unaware of it, and their clients or partners had not come to talk about it

Chen is working with several British lawyers to draft contract clauses that will pass on the increased transaction costs of the new tax regime to charterers. They advise clients to insist on these clauses when they sign a lease, but the actual operational aspect is up to the parties to negotiate.

In addition, Chen encouraged some shipowners to change the registration of their ships to countries that have bilateral tax treaties with China. If his proposal is widely adopted, it could mean an exodus of ships to places such as Greece, Cyprus and Singapore.

At this stage, Chen advises clients to report and provide complete information on income and expenses to local tax authorities in a timely manner when entering China ports of operation. However, given that there are still many questions about how to interpret the new tax system, and how to collect and enforce it, it will take some time to estimate exactly how much tax the Chinese currently have to pay in Hong Kong.

As to whether the Chinese Government would fail to pay taxes after the "retrospective collection" rule came into effect, Lawyer Chan said that the authorities would normally take a pragmatic approach.

"That risk exists," he told Trading Wind. "But usually in China, regulations come first, and how they are implemented depends on the outcome of specific negotiations."

Another unsolved problem under the new tax system is how to determine the obligations in the entire charter chain, given that ships often change hands several times. Is it only the last subcharterer that has to pay the tax, or is it the whole process including the main charterer?

A big question that arises, Chen said, is whether the broker who brokered the deal will become a 'withholding agent' if the lessee is not in China.

"If the broker in question is based in China, he is probably liable to collect taxes," he said.

In addition, the most important question is whether the tax will still apply if neither the shipowner nor the charterer is based in China. If applicable, how does China plan to implement and collect the tax?

"In my opinion, this is the most important issue that needs to be clarified," Chen said.

Still, the new rules provide a clear explanation of at least one industry concern: the applicable tax on charter ships. Previously, voyage chartering was regarded as revenue of a "service nature," but it was not clear whether time chartering was revenue of a service or charter nature. As a result, some local tax authorities treat term leases as leasehold businesses because they are taxed at a higher rate and do not enjoy the benefits of bilateral tax agreements. Now the newly issued new regulations clearly point out that whether voyage charter or time charter, all belong to the service nature of business projects.