China Law Insight : China Business and Intellectual Property Lawyers & Attorneys : King & Wood Law Firm : IP, Arbitration, Litigation, Securities, Foreign Investment

By Tony Dong and Alice Zhang, King & Wood's Tax Department

It is common for multinational companies to deploy offshore holding structures or set up special purpose vehicles ("SPVs") in tax havens to make investments, enter into cross border transactions or to list their IPOs. There are various reasons for companies to utilize offshore SPVs, and tax optimization is clearly one of the top considerations. For example, a company may take advantage of preferential tax treaty provisions or align profits to a low-tax jurisdiction or tax haven. However, in recent years, governments around the world have been tightening their tax administration of cross-border tax avoidance arrangements with TPG's recent tax dispute in Australia is the latest example. The Chinese government has been actively involved in the game, and the State Administration of Taxation ("SAT") has issued a series of regulations in 2009 to strengthen tax scrutiny on non-residents.

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By Stephen Nelson, Partner and Head of King & Wood's Taxation Practice

It is not uncommon for foreign investors to sell the shares of intermediate holding companies that hold the equity in Chinese companies as a way to exit their investments in China, in order to get around government approval procedures, as well as to avoid PRC tax on their capital gains. It certainly appears that these offshore transfers may be examined by the China tax authorities going forward, and may no longer escape the Chinese tax net. Recently, the State Administration of Taxation (the “SAT”) issued the circular Guoshuihan [2009] No. 698, “Strengthening the Tax Administration of Equity Transfers by Non-resident Enterprises” ("Circular 698”), which, for the first time, explicitly requires disclosure to the tax authorities of offshore indirect transfers of equity in PRC companies. The tax authorities may then examine the transferred offshore holding company in order to ascertain whether the structure has a reasonable commercial purpose – if not, the offshore gain could be held subject to Chinese tax.

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林燊，金杜律师事务所税务主管合伙人

过去实践中，为了绕过中国商务局、税务局等部门的审核监管，境外投资方通常会考虑采用转让设在境外（例如BVI, 香港）的控股公司的股权而达到转让国内企业股权的目的。时过境迁，这种做法现在很有可能会受到中国税务机关的挑战。近日，国家税务总局下发《关于加强非居民企业股权转让所得企业所得税管理的通知》（国税函[2009]698号，简称“698号文”），该文件第一次将间接转让（即前述的转让境外控股公司）以明文规定的形式纳入中国税务审查的范畴。税务机关将审查境外股权结构是否具有合理商业目的，如果没有，那么转让境外股权取得的资本利得仍有可能需要在中国缴税。因此，这将对境外控股公司架构及境外并购重组交易产生重大影响。

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林燊，金杜律师事务所税务主管合伙人

          中国政府对境外控股公司的反避税管理又向前迈进了一步。国家税务总局日前下发文件，即《关于如何理解和认定税收协定中”受益所有人”的通知》（国税函[2009]601号，简称“601号文”），指导地方税务机关调查认定申请人是否满足“受益所有人”的条件，以决定申请人能否享受税收协定中有关股息、利息、特许权使用费、财产转让收益等优惠待遇。该文件的发布引起广泛关注，跨境交易的税务筹划及利用境外控股公司享受税收协定优惠的安排将受到很大限制。

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By Stephen Nelson, Partner and Head of King & Wood's Taxation Practice

China’s crack down on tax anti-avoidance took another major step forward with the release of a new Circular by the SAT which may severely restrict the ability of offshore holding companies to take advantage of tax treaty benefits. The SAT’s “Notice on Interpretation and Determination of Beneficial Owner under Tax Treaties” (Guoshuihan [2009] No. 601, or “Circular 601”), directs local tax authorities to investigate whether an applicant satisfies the requirements to qualify as a beneficial owner, which is a pre-requisite to enjoy the benefit of a reduced withholding tax on dividends, interest, royalties or capital gains under a double tax arrangement.

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In the year following the entry into effect of the PRC Enterprise Income Tax Law, the Chinese tax authorities have issued several rules clarifying emphasizing the position on withholding tax on China-sourced income of non-resident enterprises. Recently, a new regulation was issued that sets out the procedural rules for withholding income tax, the Provisional Administrative Measures on Withholding Enterprise Income Tax for Non-resident Enterprises, Guoshuifa [2009] No. 3.

Stephen Nelson, Partner & Alice Zhang, Taxation

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The pass-through tax treatment for partnership enterprises has finally been officially confirmed by the PRC tax authority, via the Circular on the Issues Concerning the Income Tax of the Partners in Partnership Enterprises, Caishui [2008] No. 159, which took effect retroactively as of January 1, 2008. It represents an important first step in the development of Chinese partnership tax law. 

Stephen Nelson, Partner, and Alice Zhang, Taxation

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Towards year end of 2008, the PRC Government announced the repeal of the tax incentive allowing for the importation of equipment free of duty and VAT for encouraged foreign investment enterprises (FIEs). At the same time, the refund available for VAT paid on domestic equipment purchases was also repealed. This was in conjunction with the reform of the VAT system, discussed in an earlier blog on this site.

The PRC government now has issued two notices grandfathering the old VAT benefits until the middle of this year, one for the imported equipment and one for the domestic equipment.

Stephen Nelson, Partner, & Alice Zhang, Taxation

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On November 5, 2008, the PRC State Council passed The Provisional Regulations of the People’s Republic of China on Value-Added Tax, extending VAT reforms to all industries nationwide from January 1, 2009.

Stephen Nelson, Partner, Taxation & Alice Zhang, Legal Assistant

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The new PRC Enterprise Income Tax Law (“EIT law”) came into effect on January 1, 2008 and consolidated the enterprise income tax regimes for domestic enterprises and foreign-invested enterprises and ended the system of dual income tax regimes. The new EIT law unified the tax rates and tax incentive policies for both domestic enterprises and foreign-invested enterprises so that more equitable market conditions are created.

For those enterprises previously enjoying favorable tax incentives under the former tax regimes, the new EIT law provides a 5-year transitional period. For example, enterprises that enjoyed fixed term tax exemptions and reductions may continue to enjoy them until the end of the original term. Enterprises that used to enjoy a 15% tax rate will gradually shift from the lower rate to the 25% as required by the new EIT law. The transitional tax incentive policies are provided in many different tax regulations. The following is an introduction of some of the transitional tax policies:
 

Stephen Nelson, head of King & Wood's Taxation Practice & Wu Libin 

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The massive May 12, 2008 Wenchuan earthquake caused heavy property damage and saddening losses of life in the Chinese Providences of Sichuan, Shanxi, and Gansu. In order to support the earthquake relief and reconstruction effort, the Ministry of Finance and State Administration of Taxation has implemented post disaster tax deductions and exemptions. These relief measures impact affected individuals or enterprises, and also donations toward the relief effort. The most significant tax relief measures were announced in the “Notice on Implementing the Earthquake Relief and Reconstruction Tax Policies”(Notice 62). The taxes covered in the Notice included: enterprise income tax, individual income tax, house property tax, resource tax, stamp tax, urban land use tax, vehicle and vessel use tax, import tax.
 

By Zhang Yu, Wang Xiujuan, Chengdu Office of King & Wood, FDI

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