China announces detailed rule on withholding tax deferral treatment on direct reinvestment made by foreign investors

Transcription

1 Issue No.CTIN China announces detailed rule on withholding tax deferral treatment on direct reinvestment made by foreign investors 2 January 2018 Our observations The WHT deferral treatment introduced under Circular 88 would certainly attract foreign capital to be retained in China and with the 2017 financial year coming to an end, this is a good opportunity for foreign investors to look at the earnings of their Chinese subsidiaries to see if there are opportunities to apply for the WHT deferral treatment. Multinational Companies that are expecting dividend payments from its Chinese subsidiaries should also consider whether the dividends distributable from China can be utilized for new or reinvestments, and assess the possibilities in taking advantage of the WHT deferral scheme. Executive summary Echoing the new plan that aims to further attract Foreign Direct Investments (FDI), the Ministry of Finance (MoF), State Administration of Taxation (SAT), National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) had jointly issued Caishui [2017] No. 88 ( Circular 88 ) on 21 December 2017 to formally introduce the Withholding Income Tax (WHT) regime on reinvestment of profits attributable to foreign investors. With China s continued economic growth over the last decade still being fueled by FDI, it is expected that reinvestments by foreign investors using profits generated from existing China investments will continue to occur. To ensure FDI (and foreign capital in general) would continue to boost China s economy, and simultaneously counter for tax incentives or preferential treatments offered by other jurisdictions, Circular 88 aims to increase foreign investors eagerness in investing/(re)investing into China via the profits they generated in the PRC with an enjoyment of WHT deferral.

2 Details of Circular 88 - Conditions/requirements to enjoy WHT deferral treatment Circular 88 stipulates that foreign investors would be eligible for the WHT deferral treatment if they were to directly reinvest the attributable/distributable profits from its Chinese tax resident investee or portfolio company(s) into China ( Reinvested China Profits ), subject to meeting ALL four conditions set forth below: 1) Direct reinvestment The term direct reinvestment * refers to equity investment activities carried out by foreign investors with Reinvested China Profits, which specifically includes: Increase of capital or capital reserve in existing Chinese investee company; Establishment of new Chinese investee company; Acquisition of equity interests in Chinese companies from third party(s); or Other forms of investment activities permitted by the MoF and/or SAT. *Note that direct investment in the context of Circular 88 does not include investments into listed companies, except for those satisfying the strategic investment conditions set forth under MOFCOM Order [2005] No. 28 The Administrative Measures for Strategic Investment by Foreign Investors in Listed Companies. 2) Reinvested China Profits Reinvested China Profits should be of equity investment income nature (e.g., declared dividends or realized retained earnings from Chinese tax resident enterprises). 3) Intermediate payment/transfer prohibited China Profits being reinvested must be directly paid or transferred to the Chinese investee company(s) and/or the third party Seller disposing the Chinese company equity interests, and should not by any means be retained in any onshore or offshore bank accounts, or kept under custody by any other individuals or enterprises (other than the designated Chinese investee company or third party Seller) prior to the reinvestment. 4) Designated industry sectors Reinvestments must be made into one of the designated encouraged industries set forth under the Foreign Investment Industrial Guidance Catalogue and/or the Catalogue of Priority Industries for Foreign Investments in the Central and Western Regions. Note: 1. Announced by China s Premier Li Keqiang at the Executive Meeting of the State Council on 28 July 2017 and subsequently covered under the State Council Circular Guo Fa [2017] No The term foreign investors refers to non-resident investors (including investors resident outside the Mainland China including investors resident in Hong Kong SAR, Macau SAR and Taiwan) that have no establishment or place of business in China, or which have establishment or place of business in China but the income derived is not effectively connected with such establishment or place of business. China Tax & Investment News 2

3 Items to be clarified and EY Insights Whilst the WHT deferral treatment has been formally introduced under the longawaited Circular 88, there remains a few items which require further clarifications, including: Upon application for the WHT deferral treatment per Circular 88 provisions, would the foreign investor of a treaty-partner jurisdiction (or likewise the withholding agent) be required to simultaneously lodge the treaty benefit application or record-filing to lock in the reduced dividend WHT rate (as applicable) albeit the foreign investor may only withdraw from the reinvestment at a later stage (and thus required to repay the WHT deferred)? Article 5 of Circular 88 stipulates that foreign investors that are eligible for, but have not actually enjoyed the WHT deferral may, within three years from the point at which the WHT was paid, apply for the WHT deferral and refund on WHT paid. It is unclear whether this Article would also cover scenarios where the subject matter dividends have already been distributed/paid to the foreign investors but the cash were used for China reinvestment or new investment purposes. We understand that the SAT may be looking to issue a supplemental circular to provide more detailed guidance and documentation requirements with respect to WHT deferral treatment applications/claims. Our tax practitioners would try our best to communicate concerns over any uncertainties. Record-filing mechanism Foreign investors looking to enjoy the WHT deferral treatment mentioned above are required to provide the necessary information and documentation to the Chinese investee company(s) to justify its eligibility to enjoy the WHT deferral treatment. Upon assessment of the relevant information provided by the foreign investor and on the basis that the Chinese investee company(s) concur to the foreign investor s eligibility to enjoy the WHT deferral treatment, the Chinese investee company(s) should then proceed with the record-filings with its in-charge PRC tax authority and temporarily refrain from withholding or paying the corresponding WHT. Note that the in-charge PRC tax authority retains the rights to assess and examine the foreign investor s eligibility to the WHT deferral treatment and in the event where the PRC tax authority opines that the foreign investor did not meet the prescribed conditions, both the foreign investor and the Chinese investee company (in the capacity as the withholding agent) could face penalizing actions. Repayment of WHT deferred Where a foreign investor withdraws from a reinvestment accompanied with the WHT deferral treatment, e.g., by way of equity transfer, or buybacks, or liquidation), the foreign investor shall be required to repay the WHT deferred within seven days upon receipt of the relevant consideration from the withdrawal. Notwithstanding the above, where the withdrawal from reinvestment initiated by the foreign investor qualifies for special restructuring tax treatment, the foreign investor may continue to enjoy the WHT deferral treatment. Effective date Circular 88 takes retrospective effect from 1 January 2017, meaning that reinvestments made by foreign investors with Reinvested China Profits could enjoy the WHT deferral treatment pursuant to Circular 88 provisions (subject to meeting the required conditions). Where a foreign investor is eligible for, but has not actually enjoyed the WHT deferral treatment apply for tax refund within three years for the day on which the WHT was paid. Note: 3. In case the reinvestment is made by way of non-cash instruments, e.g., securities or other form of tangible goods, the corresponding ownerships/titles must be transferred directly to the designated Chinese investee company(s) or third party Seller disposing the Chinese company equity interests. China Tax & Investment News 3

4 Contact us For more information, please contact your usual EY contact or one of the following of EY s China tax leaders. Office Tax Leaders Martin Ngai (Beijing) martin.ngai@cn.ey.com Fisher Tian (Tianjin) fisher.tian@cn.ey.com Samuel Yan (Dalian/Shenyang) samuel.yan@cn.ey.com Lucy Wang (Qingdao) lucy-c.wang@cn.ey.com Joanne Su (Xi an) joanne.su@cn.ey.com Vickie Tan (Shanghai) vickie.tan@cn.ey.com Raymond Zhu (Wuhan) raymond.zhu@cn.ey.com Audrie Xia (Suzhou) audrie.xia@cn.ey.com Andrew Chen (Nanjing) andrew-jp.chen@cn.ey.com Patricia Xia (Hangzhou) patricia.xia@cn.ey.com Chuan Shi (Chengdu) chuan.shi@cn.ey.com Clement Yuen (Shenzhen) clement.yuen@cn.ey.com Rio Chan (Guangzhou/Changsha) rio.chan@cn.ey.com Jean Li (Xiamen) jean-n.li@cn.ey.com David Chan (Hong Kong) david.chan@hk.ey.com Heidi Liu (Taipei) heidi.liu@tw.ey.com Service Line Tax Leaders Andrew Choy (International Tax) andrew.choy@cn.ey.com Paul Wen (People Advisory Services) paul.wen@hk.ey.com Kenneth Leung (Indirect Tax) kenneth.leung@cn.ey.com Travis Qiu (Transfer Pricing) travis.qiu@cn.ey.com Becky Lai (Tax Policy) becky.lai@hk.ey.com Jesse Lv (Transaction Tax) jesse.lv@cn.ey.com Samuel Yan (Global Compliance & Reporting) samuel.yan@cn.ey.com Sector Leaders Catherine Li (Financial Services) catherine.li@cn.ey.com Alan Lan (Energy & Resources) alan.lan@cn.ey.com Martin Ngai (Technology, Media, Telecommunications) martin.ngai@cn.ey.com Vickie Tan (Life Science) vickie.tan@cn.ey.com Gary Chan (Real Estate) gary.chan@cn.ey.com Audrie Xia (Consumer Products) audrie.xia@cn.ey.com Walter Tong (Automotive & Transportation) walter.tong@cn.ey.com Raymond Zhu (Government& Public Sector) raymond.zhu@cn.ey.com Greater China Tax Leader Henry Chan henry.chan@cn.ey.com China Tax Center Jane Hui jane.hui@hk.ey.com China Tax & Investment News 4

5 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young (China) Advisory Limited. All Rights Reserved. APAC No ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/china Follow us on WeChat Scan the QR code and stay up to date with the latest EY news.