Chris Devonshire-Ellis: Hummer Deal Failed Due to Non-Recognition of Offshore Holdings

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Op-Ed Commentary: Chris Devonshire-Ellis

Feb. 25 – In a case that has tax planning and legal structuring implications for businesses investing in China, it is apparent that the failed deal with Hummer has its roots not just in the ability for Tengzhong Heavy Industrial Machinery to persuade the central government that it was a good idea, but also that an alternative structure, to move the deal offshore as a Tengzhong ownership has also been knocked back.

While Beijing was cool on the deal – Hummer vehicles do not fit with the central government’s policy of promoting fuel efficient vehicles, and was unsure that Tengzhong possessed the expertise to make the deal work – the implications for investors in China can be placed into two categories: political interference and potential China tax liabilities for the seller. Firstly, the fact that the central government can and is fully prepared to impose its own will on domestic businesses (it’s a reminder that China remains far from being a free market). And that government interference, which can become political rather than commercial, still has the status of final decision. The implications of this are well known of course, however the Hummer bid is a stark reminder that when courting Chinese buyers, the government lurks behind the scenes. Political due diligence in China, finding out if deals will actually progress or not, will become an increasingly important part of any foreign company’s strategy when it comes to investing.

Within this aspect also lies an interesting observation that links the Hummer deal in terms of behavior with the failed Coke-Haiyuan venture. On both occasions, details of the planned acquisition were leaked to the media and reported prior to any approval having taken place. The concept of attempting to force the central government’s hand by making proclamations of mergers and acquisitions in media and to the press prior to government approval being granted is unwise. Lawyers and advisers working on China M&A deals would be well advised to keep quiet about it until government approval is guaranteed.

The other aspect of the failure that should be of interest to the China legal community is the recognition, or failure of recognition, of the usage of offshore company jurisdictions when it comes to a China deal. Tengzhong, aware that government approval was likely to be knocked back, had as alternative the ability to acquire the Hummer brand via an offshore entity and to import vehicles to China instead. Regardless of the fact that China may still have blocked imports of the vehicle, of note is the directive that the State Administration of Tax issued in November last year. In it, China essentially stated that these deals may be re-characterized if there is no “reasonable commercial purpose” for the indirect transfer of a Chinese company through an overseas holding company other than that of tax planning; and that the existence of the intermediate offshore company used for the transfer may not be recognized. Also implicit in the regulation is that China may consider the transference of Chinese assets to an offshore vehicle to be a taxable transaction. In which case, GM, as owner of Hummer, would have been liable for Chinese income tax on the proposed US$150million sale.

The Hummer deal accordingly failed for three reasons: the inability for Tengzhong to obtain state support, and the inherent liabilities of proceeding with a plan B; non-recognition by China of use of an offshore jurisdiction for an alternative structure; and the potential passing of an income tax penalty to GM on the sale price of its own company. Lawyers involved in China M&A would do well to consider these new hurdles.

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and has been involved with many cross border China M&A transactions over the past 20 years. Chris also contributes to India Briefing , Vietnam Briefing , Asia Briefing and 2point6billion

For more information concerning China’s tax regulations in relation to offshore entities, please email Sabrina Zhang, the national tax partner for Dezan Shira & Associates, at

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