China Clarifies Capital Gains Under DTAs

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Apr. 24 – On December 31, 2012, China’s State Administration of Taxation (SAT) promulgated the “Announcement on Issues Concerning Capital Gains Article under Tax Treaties (SAT Announcement 2012 No. 59, hereinafter referred to as the ‘Announcement’).” The Announcement is intended to supplement Guoshuifa (2010) No. 75 (“Circular 75”) released by the SAT in September 2010, which provides a detailed interpretation of the 2007 DTA between China and Singapore and also applies to China’s other tax treaties.

The Announcement provides increased certainty regarding the circumstances under which capital gains from equity transfers by non-residents enterprises or individuals are subject to withholding tax in China. More specifically, the Announcement elaborates on two circumstances under which a transfer is subject to China tax as provided by Paragraphs 4 and 5, Article 13 of the China-Singapore DTA:

  • Where the transferred shares directly or indirectly derive more than 50 percent of their value from immovable property in China; and
  • Where, at any time during the 12-month period preceding the transfer, the non-resident transferor directly or indirectly participated in at least 25 percent of the capital of the Chinese enterprise in which shares are being transferred.

Regarding the first circumstance, the Announcement clarifies that the company’s properties and immovable properties should be valued in compliance with the most current Chinese accounting standards concerning the treatment of assets, without taking into consideration the liabilities of the enterprise. The value of the relevant land or land use rights should not be lower than the fair market price of neighboring or comparable land. With respect to the second circumstance, the Announcement clarifies what constitutes direct or indirect participation.

Portions of this article came from the April 2013 issue of China Briefing Magazine titled, “M&A Regulations in China.” This issue of China Briefing Magazine focuses on the regulatory issues affecting cross-border M&As, and the key tax points foreign investors should be aware of when conducting M&As involving domestic Chinese companies. We also address the key aspects of transfer pricing, corporate restructuring exemption, and valuation as they relate to M&As.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

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