China Clarifies Special Tax Treatment for Non-Tax Residents in Equity Transfers

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Dec. 24 – China’s State Administration of Taxation (SAT) promulgated the “Announcement Concerning Issues of Adopting Special Tax Treatment in Equity Transfers for Non-Tax Residents (NTRs) (Announcement [2013] No. 72, hereinafter referred to as “Announcement 72”)” on December 12, 2013, to clarify the details for NTRs on the application and record-filing procedure in adopting special tax treatment. It is a supplementary regulation of a former announcement released jointly by the SAT and the Ministry of Finance (MOF) in 2009, which addresses the treatment of corporate income tax (CIT) in merges and acquisitions. Detailed information can be found below.

Under Chinese CIT Law, an NTR refers to an enterprise established under foreign laws and whose actual administrative institutions are outside of China, yet which has an establishment in China or receives income which originates from China.

Announcement 72 only applies under the following two circumstances:

  1. Where a NTR transfers its equity of a resident enterprise to another NTR wholly and directly controlled by the transferor NTR. In this case, no change is caused thereby to the subsequent withholding tax burden, and the transferor NTR makes a written commitment to the competent tax authority that it will not transfer its equity of the transferee NTR within three years.
  2. Where a NTR transfers equity of a resident enterprise to another resident enterprise wholly and directly controlled by the transferor NTR.

Under the first circumstance, the transferor NTR should make record-filing at the local tax bureau of the resident enterprise receiving the transfer, while under the second circumstance, the transferee is obligated to complete the record-filing procedure.

Announcement 72 also stipulates the relevant materials required to be submitted in record-filing, as follows:

  • The official “Record-Filing Form for NTRs Adopting Special Tax Treatment in Equity Transfer”;
  • General information on the equity transfer, including the commercial purpose of the transfer, company shareholding structure chart before and after the transfer, and other evidence for the fulfillment of the conditions for special tax treatment;
  • Contract or agreement of the equity transfers (Chinese translation included);
  • Approval documents for the equity transfer issued by the Administration of Industry and Commerce, or other relevant government departments;
  • Information on undistributed profits of the transferred enterprise accumulated in the past year up till the time of the transfer; and
  • Other information as requested by the tax authority.

Additionally, Announcement 72 states that special tax treatment is not allowed if the transfer may alter the withholding tax burden. For example, if the equity shares are transferred to a no-tax or lower-tax country or jurisdiction, special tax treatment will not apply.

If the special tax treatment is denied by the tax authority, general tax treatment will be adopted for the equity transfer.

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