China’s SAT Releases Clarifications on Capital Gains Under DTAs
Jan. 25 – On December 31, 2012, the State Administration of Taxation (SAT) promulgated the “Announcement on Issues Concerning the 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 Double Taxation Agreement between China and Singapore (“China-Singapore DTA”) and is applied to China’s other tax treaties.
The Announcement specifically addresses Article 13 of the China-Singapore DTA, i.e. the capital gains article. It provides increased certainty and clarity with regard to how this article is applied, i.e. 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 the transfer is subject to China tax:
- 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 which shares are being transferred.
With regard to the first circumstance, the previously issued Circular 75 clarified as follows:
At any time within a certain period (this period is not defined in the DTA, and is temporarily deemed to be three years) before the transfer of shares, if more than 50 percent of the share value of the resident company being transferred is directly or indirectly composed of immovable properties located in China, the Singaporean residents holding the income from the transfer should pay Chinese tax.
The Announcement further clarifies that “three years” is defined as 36 consecutive calendar months (not including the month that the transfer occurs). In addition, “immovable properties” should include houses and buildings, land use rights, and properties attached to the immovable properties that are used for both business purpose and non-business purposes.
Further, the Announcement provides that the company’s properties and immovable properties should be determined and valued in compliance with the Chinese accounting standards concerning the treatment of assets that are effective at the time of occurrence, without taking into consideration the liabilities of the enterprise. The value of the lands or land use rights that constitute the immovable properties should not be lower than the fair market price of neighboring or comparable land. If the taxpayer is unable to perform reliable measurement in line with the above rules, the tax authorities will make reasonable valuation accordingly.
With respect to the second circumstance, Circular 75 clarified direct or indirect participation to constitute direct ownership, indirect ownership, and where there are “significant interest relationships.” The Announcement replaces the relevant provisions in Circular 75 with clearer definitions of these terms and specifies the following:
- Direct ownership includes circumstances where nominees are used by non-residents to hold equity in the Chinese enterprise, and the non-resident exclusively owns the profit derived from the capital and bears the actual risk of the participation.
- Indirect ownership refers to at least 10 percent holding in the intermediate holding company through which equity in the Chinese enterprise is held. Indirectly participated capital should be calculated by multiplying the capital percentages held by the participant companies or other entities involved.
- The Announcement also defines more clearly who is to be considered to be related persons with ‘significant interest relationships’, i.e.: Individuals (including spouse, parents, grandparents, offspring, etc.) who share the same benefits derived from the capital participation; and individuals, companies, or other entities who directly or indirectly own 100 percent capital of the non-resident company/entity.
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