Dec. 29 – The Chinese tax authorities may impose withholding tax on non-resident enterprises that indirectly dispose equity interests in Chinese resident enterprises outside China if there is an abuse in the form of organization.

Issued on December 15, the circular Guoshuihan [2009] No.698 has several key points:

• Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country (jurisdiction) where the effective tax burden is less than 12.5 percent or where the offshore income of her residents is not taxable, the foreign investor shall provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers
• Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through the abuse of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability is avoided, the tax authority shall have the power to re-assess the nature of the equity transfer in accordance with the “substance-over-form” principle and deny the existence of the offshore holding company that is used for tax planning purposes
• “Income derived from equity transfers” as mentioned in this circular refers to income derived by non-resident enterprises from direct or indirect transfers of equity interest in China resident enterprises, excluding share in Chinese resident enterprises that are bought and sold openly on the stock exchange

For more information on withholding taxes in China please contact Dezan Shira & Associates at tax@dezshira.com or visit www.dezshira.com.