China Clarifies Special Tax Treatment for Non-Tax Residents in Equity Transfers
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  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:
- 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.
- 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.
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.
You can stay up to date with the latest business and investment trends across China by subscribing to Asia Briefing’s complimentary update service featuring news, commentary, guides, and multimedia resources.
The China Tax Guide: Tax, Accounting and Audit (Sixth Edition)
This edition of the China Tax Guide, updated for 2013, offers a comprehensive overview of the major taxes foreign investors are likely to encounter when establishing or operating a business in China, as well as other tax-relevant obligations. This concise, detailed, yet pragmatic guide is ideal for CFOs, compliance officers and heads of accounting who need to be able to navigate the complex tax and accounting landscape in China in order to effectively manage and strategically plan their China operations.
Understanding Permanent Establishments in China.
This month’s China Briefing Magazine casts some light on permanent establishment status in China by discussing the circumstances triggering a PE in China, focusing on Service PEs. We also discuss the tax implications for a non-resident enterprise where its activities in China constitute
- Previous Article China Clarifies VAT General Taxpayer Recognition Under Nationwide Tax Reform
- Next Article China Specifies VAT Exemption for Offshore Outsourcing Services