China Releases GAAR Administrative Measures
- Courtesy of Mr Glen Wei, an attorney at law, certified tax adviser, and CPA based in China.China's State Administration of Taxation (SAT) on December 12 issued Decree 32 (dated December 2) introducing administrative measures for applying the domestic general anti-avoidance rule to special tax adjustments made to enterprises' tax avoidance arrangements.
- The draft guidance said one of the features of a tax avoidance arrangement is that its sole or main purpose, or one of its main purposes, is to obtain tax benefits. The term "one of its main purposes," which caused much public concern, does not appear in the administrative measures.
- The administrative measures also omit the requirement that corporate taxpayers submit their advice from tax advisers. Consistent with the draft, however, Decree 32 gives the competent tax authority the power to demand relevant information and supporting documents from entities or individuals that provided the investigated taxpayers with tax planning services regarding the arrangement.
- Decree 32 sets a nine-month period —beginning with the approval date of a GAAR investigation from the SAT— for the competent tax authority to reach a conclusion in the investigation.
- The measures will take effect on February 1, 2015, and will also apply to cases that have not been closed as of that date.
- In September and October 2014, a number of local-level tax authorities in China launched investigations into dividend payments made to non-Tax Resident Enterprises (non-TREs), hereinafter referred to as (Investigation). This Investigation relates to an internal notice issued by SAT requesting local-level tax authorities to identify potential risk areas in relation to the Corporate Income Tax (CIT) collection on dividends. It is the first time the SAT has launched such a widespread investigation into this area since 2008. The authorities are looking at (1) the timeliness of the withholding tax deduction, (2) whether there have been any constructive dividends that have not been disclosed by the Chinese company, (3) whether the withholding tax has been paid where the foreign shareholder reinvested the dividend back in the Chinese company and (4) whether the foreign company receiving the dividend is the beneficial owner of the dividend, so that it can enjoy the reduced withholding tax rate under a favourable tax treaty.
Relaxed Outbound Investment Rules
- On 6 September 2014, the Ministry of Commerce (MOFCOM) promulgated the Administrative Measures for Outbound Investment (2014 MOFCOM Measures), replacing the original Administrative Measures for Outbound Investment which were in effect since March 2009 (2009 MOFCOM Measures). These measures are a meaningful step in facilitating outbound investment by Chinese companies consistent with China's "Go Out Policy" and its goal of adopting international standards for investment procedures.
- Under the new rules, only outbound investment projects involving sensitive countries/regions or sensitive industries are required to be approved by the MOFCOM or its provincial offices. All other projects need only be filed with the MOFCOM or its provincial offices, regardless of the investment size.
Foreign Investors Exempt from Capital Gains Tax on Sale of Shares
- Courtesy of PWC. It was reported on 14 November 2014 that the Ministry of Finance and the State Administration of Taxation have jointly released Caishui  No.81 (Notice 81), on the China taxation rules in relation to the Shanghai-HK Stock Connect (Stock Connect). Under Notice 81, corporate income tax, business tax, and individual income tax will be temporarily exempted on gains derived by foreign investors on the trading of A shares through the Stock Connect. In addition, dividends will be subject to 10percent withholding tax and the company distributing the dividend has the withholding obligation. If the recipient of the dividend is entitled to a lower treaty rate, it can apply to the in-charge tax bureau of the payer for a refund. The effective date of the Notice is 17 November 2014.
- At the same time, the Ministry of Finance and the State Administration of Taxation also jointly released Caishui  No.79 (Notice 79) to address the outstanding tax issues in relation to QFII's and RQFII's. Under Notice 79, QFII's and RQFII's without an establishment or place in China will also be temporarily exempted from paying corporate income tax on gains derived from the trading of shares effective from 17 November 2014. However, it is clearly stipulated in Notice 79 that QFII's and RQFII's would be subject to corporate income tax on gains realized before 17 November 2014.
China Disregards US Intermediary to Tax Gain from Indirect Share Transfer
- Courtesy of Mr Glen Wei. It was reported that China's State Administration of Taxation has approved the Zhejiang National Tax Bureau's request to tax a U.S. company's transfer of its shares in a U.S. intermediate holding company in accordance with Guoshuihan  698 (Circular 698). When the transaction took place, the intermediary owned a Chinese resident enterprise in Zhejiang province. Previously, foreign corporate transferors were assessed Chinese tax on capital gains from indirect share transfers involving Chinese companies under Circular 698 because the transferred foreign intermediate holding companies were located in zero or low-tax jurisdictions. In this case, however, the transferred holding company was not located in a zero or low-tax jurisdiction, but rather, in the United States.
Foreign Investment Partnership in China Taxed on Profit Distributions
- Chinese law does not clarify how to tax a foreign partner's income from a foreign investment partnership (FIP) in China. Courtesy of Mr Glen Wei, it was reported that a Chinese tax bureau recently took a position on the issue, determining that an unidentified Hong Kong company is subject to a 25 percent enterprise income tax on profits distributed by an FIP in China. It is rare to see publicly available cases involving foreign partners' taxation on partnership income in China. This most recent tax determination provides general guidance on such matters.
New Visa Requirements for Short Term Workers
- On 6 November 2014, the Ministry of Human Resources and Social Security (MHRSS), Ministry of Foreign Affairs, Ministry of Public Security and Ministry of Culture jointly published a notice (the Notice) to further regulate and clarify the visa requirements for certain short-term workers (including employees and contractors) coming to China. The Notice distinguishes between Z and F visas and takes effect on 1 January 2015. Multinational companies (MNCs) sending their short-term workers to work in China should be aware of the new visa requirements and the possible impact on their short-term workers and business partners.
Tax Arrangement Between China and Taiwan
- It was announced that on 13 November 2014, the Chinese and Taiwanese authorities had completed talks on a tax arrangement (similar to that of a tax treaty) between China and Taiwan. The arrangement still has to be signed and ratified by both sides.
New Double Taxation Agreement Signed with Russia
- On 13 October 2014, China and Russia concluded a new double taxation agreement (DTA) and protocol (together referred to as 'the new DTA'). The new DTA embodies the new trends in the development of international tax treaty. Main changes in the new DTA include: time threshold for service permanent establishment (PE) decreased to 183 days; withholding tax (WHT) rate on dividends, interest, and royalties reduced to five percent, five percent and six percent respectively; and a standalone limitation of benefits (LOB) article enforced to tackle treaty shopping. When it comes to effect, the new DTA will replace the currently applicable treaty signed in 1994 (1994 DTA) and is expected to further enhance economic cooperation between both countries.
The Launch of Shanghai-Hong Kong Stock Connect
- It was announced on 12 November that the much-anticipated Shanghai-Hong Kong Stock Connect, a pilot programme for establishing mutual stock market access between Mainland China and Hong Kong, will commence on 17 November 2014.
- The programme will allow non-PRC investors to trade in A-shares listed on the Shanghai Stock Exchange (SSE) via the Hong Kong Stock Exchange (HKSE), and PRC investors to trade in HKSE listed shares via the SSE. Prior to the launch of Stock Connect, non-PRC investors could only access A-shares via institutional investor programmes administered by the China Securities Regulatory Commission.
- Tax is a risk that is advisable to cover in disclosures. The market remains concerned about the PRC tax treatment - specifically whether PRC capital gains tax will be levied on A-share trades made through Hong Kong. Based on Circular 81, Chinese capital gains tax derived by foreign sellers on the sale of A shares after 17 November 2014 are exempt from Chinese capital gains tax.
- In addition to documentation for authorised funds, asset managers are advised to consider appropriate investor documentation treatment across all products and services which may seek to take advantage of Stock Connect, such as supplemental Investment Management Agreements for segregated accounts to cover additional broker terms and to secure the client's acknowledgement of the related risk disclosures.
Qualified Financial Institutions
- Based on Circular 79 issued on 17 November 2014, capital gains realised by QFIIs or RQFII's on the sale of Chinese shares are exempt from Chinese capital gains tax in respect of sales occurring after 17 November 2014.
Exemption of Stamp Duty on Exchange Traded Funds
- On 5 December 2014, the Hong Kong Government formally released its draft legislation to waive stamp duty for the transfer of shares or units of all exchange traded funds (ETFs). The Stamp Duty (Amendment) Bill 2014 was introduced to the Legislative Council on 17 December 2014 (the Bill). It is expected to have wide support. The proposed ETF stamp duty waiver will take effect on the day when the Stamp Duty (Amendment) Ordinance is published in the Gazette after its enactment by the Legislative Council.
- Under current law, for ETFs with their registers of holders maintained in Hong Kong that track indices comprising more than 40 percent in Hong Kong stocks, the buyer and the seller each needs to pay a stamp duty at 0.1percent of the value of the transaction (0.2 percent in total).
- The Government has since 2010 extended a stamp duty remission for ETFs with their registers of holders maintained in Hong Kong that track indices comprising not more than 40percent in Hong Kong stocks as an initiative to encourage the Hong Kong listing of ETFs tracking regional indices. As of 30 September 2014, there were a total of 121 ETFs listed in Hong Kong; and of these, 26 ETFs fell outside the remission measure such that stamp duty applies to sale and purchase of their shares or units.
- The Bill announced in the 2014-15 Budget waives the stamp duty for the transfer of all ETF shares or units, so that the transaction costs of ETFs with their registers of holders maintained in Hong Kong and with more than 40 per cent of Hong Kong stocks in their portfolios will be reduced as well.
- According to the Government, the measures will remove the competitive disadvantage faced by ETFs tracking Hong Kong stocks on the Stock Exchange of Hong Kong (SEHK) and which have their registers of holders maintained in Hong Kong. This appears to verify the effectiveness of past stamp duty planning measures implemented in relation to ETFs tracking Hong Kong stocks listed on stock exchanges outside Hong Kong and which maintain their registers of holders outside Hong Kong. ETFs are currently not defined under any Hong Kong statutes. With regards to the nature and operation of ETFs in Hong Kong and other markets, the draft legislation defines an ETF as "an open-ended collective investment scheme the shares or units of which are listed or traded on a recognized stock market". This wide definition suggests that, with planning, the exemption can apply to a broader-class of listed collective investment schemes beyond traditional ETFs. Overall, this is a welcome step to promote the development, management and trading of ETFs in Hong Kong, and is in line with the approach of other financial centres like London and Singapore.
The Latest IRD's Views on Important Profits Tax Issues
- In the 2014 annual meeting between the Inland Revenue Department (IRD) and the Hong Kong Institute of Certified Public Accountants (HKICPA), the IRD expressed its views on a number of tax issues in the domestic and treaty context that are of interests to taxpayers. The following profit tax issues were discussed in the meeting: (1) source rule for dividends/ distributions; (2) deduction of share-based payment and recharge; (3) application of the anti-avoidance provision on transfer of a tax loss company; and (4) taxation of Hong Kong investment managers/advisors.
- While the meeting minutes are not law and taxpayers can hold a different view from those expressed by the IRD in the meeting, the minutes serve as a good reference on the IRD's stance on various tax issues. Companies with business operations in Hong Kong or doing business with Hong Kong should take into account the views expressed by the IRD in the meeting minutes in both of their tax planning and tax filing processes for an effective management of their tax matters.
- Noteworthy points are that the IRD considers dividends paid by a fund management company which carries out its work in Hong Kong to be onshore sourced income (and thus taxable for the recipient) because the dividends stem from activities done in Hong Kong. Furthermore, the IRD takes the view that an indirect change in the shareholding of a Hong Kong company which utilises its tax losses not to be exposed to the anti-abuse section 61B of the IRO, as it looks at direct shareholding changes. Yet, these cases may be subject to other anti abuse sections in the IRO, e.g. s.61 and 61A. Another interesting point to note is that the IRD has been investigating fund management fees charged by fund managers operating in Hong Kong and have found many cases (where the fees were based on a cost plus method) to be too low in comparison to what they should be if one takes into consideration functions, assets and business risk.
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Originally published /January 2015
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