Overseas investors who derive dividends from China are normally subject to a 10 percent corporate income tax (CIT) in China. The invested company that distributes the dividends or profits is obliged to withhold the relevant tax and file with the tax bureaus in charge.
However, per the provisions of double tax avoidance agreements (DTAs), overseas investors have a chance to enjoy a lower tax rate on China-sourced dividends if the overseas investor is a tax resident of the other party to a tax treaty and is the beneficial owner of the dividends, depending on the corresponding articles in the DTA.
Overseas investors shall make a self-assessment on whether they are qualified for DTA benefits and file a report to the tax authority to enjoy the DTA benefits.
For investors/applicants that are hoping to be qualified to enjoy the treaty benefit on their China-sourced dividends, the determination of their Beneficial Owner (BO) status has always been a key point.
On February 3, 2018, China’s State Taxation Administration (STA) released the STA Announcement  No.9, which integrated and updated a series of issues concerning the BO status determination.
The Announcement has introduced a new “same jurisdiction/same treaty benefit rule” in respect of multi-tier holding structures, under which some overseas companies can be qualified as BO and enjoy the DTA benefits.
Here, based on a particular case study, Dezan Shira & Associates (DSA) provides a detailed analysis of the new “same jurisdiction/same treaty benefit rule” when applying the DTA benefits to avail lower tax rates for the repatriation of dividends.
Company A is a tax resident of Hong Kong (not a listed company) and directly holds 100 percent equity interest of a wholly foreign owned enterprise (WFOE) in China. Company A does not carry out substantive business activities except for the holding of the WFOE.
Company F is also a tax resident of Hong Kong and directly owns 100 percent equity interest of Company A. Company F carries out trading activities all over the world.
The WFOE in China plans to distribute its accumulated profit as dividends to its parent company A and hopes to enjoy a preferential tax rate of five percent for dividend under DTA between Hong Kong and Mainland China.
To claim the tax treaty benefits on the dividends distributed by its WFOE, Company A must be determined as a BO based on the rules set out by the STA Announcement  No.9.
In determining the BO status of the overseas investor, the Announcement No.9 listed out five unfavorable factors as follows:
However, the applicant can still be determined as a beneficial owner without conducting the above-mentioned unfavorable factors test under the “safe harbor” rule, if the applicant is:
After a preliminary assessment, Company A failed to pass the five unfavorable factors test of beneficial ownership under the STA Announcement  No.9 because the company did not carry out substantive business activities. The company is not eligible for the safe harbor rule either.
So, does Company A still have any chance to enjoy treaty benefits on dividends? Under the STA Announcement  No.9, a further review on the status of Company F is necessary.
The “same jurisdiction/same treaty benefit rule” regulated in the Announcement  No.9 state that:
Where the income derived by the applicant from China is dividend income, if the applicant does not satisfy the criteria for “beneficial owner” but the person who holds 100% of the applicant’s shares directly or indirectly satisfies the criteria for “beneficial owner” and the circumstances falls under either of the following scenarios, the applicant shall be deemed as a “beneficial owner”:
——“same jurisdiction” rule.
“satisfies the criteria for “beneficial owner” shall mean that it can be determined that the person is a “beneficial owner” upon comprehensive analysis conducted pursuant to the provisions of Article 2 of this Announcement.
“a person who satisfies the criteria” shall mean that the said person, when derives dividend income from China, enjoys identical or more favorable tax treaty treatment pursuant to a tax treaty entered into between China and the country (region) for which he/she is a resident, than the tax treaty treatment enjoyed by the applicant.
——“same treaty benefit rule”.
Company F is an HK tax resident and directly owns 100 percent equity interest of Company A. In this case, Company F can pass the unfavorable factors test and is qualified as a BO, therefore Company A can be deemed as a “beneficial owner” as well for the dividend distributed from the WFOE under the “same jurisdiction” rule.
The Announcement  No.9 increased the chance of enjoying treaty benefits on dividend for applicants who are neither qualified as a beneficial owner nor eligible for the safe harbor rule in the past.
The Announcement  No.9’s explanatory note set out several examples to clarify the applicant’s BO status under different investment structures. It is clear that even if an applicant lacks BO status, the applicant still has a chance to be deemed as a BO as long as the shareholder who directly or indirectly owns 100 percent equity interest of the applicant satisfies the criteria for BO and meet the criteria set in the Announcement  No.9 (“same jurisdiction/same treaty benefit rule”).
Disclaimer: This case study is one of the scenarios that meets the same jurisdiction/same treaty benefit rule. For different group structures, analysis will be made case by case.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
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