Indirect (Offshore) Shares Transfer (Circular 698)

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Homer Walton
6 years ago
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1 Legislation Guoshuihan 2009 Circular 698 issued on Dec Introduction Prior to the issue of Circular 698, it is common practice for foreign investors to use Special Purpose Vehicles SPV as an intermediate holding company for investments in China with two key benefits: 1. If the SPV is established in a jurisdiction that has a favorable tax treaty with China, the SPV may benefit from preferential withholding tax rates on dividend income and other passive income. 2. If the foreign investor wants to dispose of the investment in China, it may sell the shares of the SPV without triggering income tax in China with respect to the sale. Investor Co (Overseas) SPV Co (Overseas) Offshore PRC Co (China) PRC Offshore Disposal When offshore investor undertakes an indirect shares disposal of offshore investment holding companies that ultimately hold PRC resident enterprises. Disclosure Requirement Investors are required to disclose the indirect shares transfer / disposal under Circular 698 where: Page 1 of 5, Updated 23-Feb-14

2 Jurisdiction of the entity whose shares are transferred has an effective tax burden of less than 12.5%; or Jurisdiction exempts its residents from tax on offshore income. Disclosure obligation of the PRC enterprise (entity being transferred) Provide a copy of the share transfer agreement to the relevant PRC tax authority when it completes the tax registration change procedures. Disclosure obligation of the offshore holding company (of PRC resident enterprise) Disclose to the relevant PRC tax authority within 30 days upon conclusion of the equity transfer contract the following information: i. Equity transfer contract; ii. Relationships between foreign investing party and offshore holding company it transferred with respect to the funds, operation, purchase and sale; iii. Status of the production, operation, personnel, finance, assets and other aspects of the offshore holding company transferred by the foreign investing party; iv. Relationships between the offshore holding company being transferred and the PRC resident enterprise with respect to the funds, operation, purchase and sale; v. Statement of the reasonable commercial/business purpose for the establishment of the transferred offshore holding company by the foreign investing party. Withholding Obligations Where the withholding agent (SPV Co) fails to fulfill its withholding obligations, the foreign investor itself must selfdeclare and pay withholding taxes on the equity transfer gains to PRC tax authorities within 7 days from the agreed upon date of the share transfer or from the date when the foreign investor actually receives the proceeds of the share transfer. Application of PRC General Anti-Tax Avoidance Rules GAAR For a reportable transaction under Circular 698, where the offshore investor fails to adequately demonstrate reasonable commercial/business purpose pertaining to the offshore disposal, the PRC authorities can seek to apply GAAR to challenge the offshore disposal on the basis of abuse of organizational form and re-characterize the transaction and disregard the existence of the offshore holding company (SPV). This effect is to view the transaction as having occurred inside China and be subjected to full PRC taxes. Page 2 of 5, Updated 23-Feb-14

3 Applicable Taxes 10% on realized gain Equity Transfer Income on withholding basis (chargeable on seller Foreign Investor (SPV) Co) Equity Transfer Income Equity Transfer Income = Equity Transfer Price Cost of Shares Equity Transfer Price includes all forms of consideration received by the foreign investor cash, non-monetary assets; equity. If foreign investor transfers the shares to a related party using non arms-length price, PRC tax authority may adjust the equity transfer price. Cost of shares comprises: Purchase price paid by the foreign investor when acquiring the Chinese investee company; OR The capital contribution made by the foreign investor to the Chinese investee company to acquire its equity. What constitutes reasonable commercial / business purpose? Offshore investor needs to demonstrate commercial / business purpose outweighs tax motivated purposes through the following aspects: Not purely a holding company; Have business activities, staffs, assets; Has ownership of or a direct lease interest in the property and equipment used. Page 3 of 5, Updated 23-Feb-14

T.C. NG & Company CPA Limited 伍子材會計師事務所有限公司 Founded in 1964, we are a long established and leading professional accountancy practice in Hong Kong.

Our team of experienced finance professional led by three directors each with in-depth expertise in commerce and industry, auditing and taxation. andrewng@tcng-cpa.

business process reengineering and IPOs, Andrew has assisted clients in statutory audits and delivered improvements to organizational finance functions and business operations, delivered turnaround

4 T.C. NG & Company CPA Limited 伍子材會計師事務所有限公司 Founded in 1964, we are a long established and leading professional accountancy practice in Hong Kong. We provide quality auditing, taxation and business consulting advices to local and multi-national corporations. Our team of experienced finance professional led by three directors each with in-depth expertise in commerce and industry, auditing and taxation. andrewng@tcng-cpa.com Andrew Ng CPA Practicing, FCA, MHKSI, BA Founder (TCN Consulting Services Limited) Andrew, a UK educated and qualified Chartered Accountant, has over 20 years experience in financial management, business process reengineering and IPOs, Andrew has assisted clients in statutory audits and delivered improvements to organizational finance functions and business operations, delivered turnaround bottom line improvements. Prior to returning to this family firm, Andrew had held senior finance positions with A.S. Watson & Co., Coca Cola Corporation and Cadbury Schweppes Plc. edwinchiu@tcng-cpa.com Edwin Chiu CPA Practicing, FCCA, ACA Edwin joined the firm in Edwin serves clients in HK listed companies, real estate development, manufacturing, trading, technology, engineering, publishing. Edwin also acts as auditor for a number of charitable foundations and NGOs, including but not limited to the Women s Welfare Club; Causeway Bay Kai Fong Welfare Association; Children Catastrophic Disease Foundation, AJR Charitable Foundation and Braincare. He is also member of a School Management Committee of a government primary school and the honorary treasurer of the Hong Kong Anti-Cancer Society. eddieman@tcng-cpa.com Eddie Man CPA Practicing, FCA, MSc Eddie, a UK educated and qualified Chartered Accountant, joined the firm in After graduating with a Master Degree in Finance in University of Lancaster in UK, Eddie worked for a big 4 firm in London for four years before returning to HK. Eddie has broad experience in auditing, taxation, liquidations and has been actively involved in tax investigation and tax planning engagements. Page 4 of 5, Updated 23-Feb-14

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PRC Enterprise Income Tax Guide

PRC Enterprise Income Tax Guide Legislation China Enterprise Income Tax Law (EITL) 企業所得稅法 enacted 16 Mar 2007, effective 1 Jan 2008. China Enterprise Income Tax Implementation Rules (EITIR) 企業所得稅法實施條例 enacted 6 Dec 2007, effective 1