The State Administration of Taxation ("SAT") issued the Public Announcement on Certain Issues Concerning Special Tax Treatment on Equity Transfers by Nonresident Enterprises ("Announcement 72") on December 12, 2013 to clarify certain filing and pre-transfer dividend issues concerning special reorganization tax treatment to equity transfers by nonresident enterprises.
Certain reorganizations qualify for special reorganization tax treatment where no gain or loss will be recognized at the time of reorganization. One of these qualifying transactions is the transfer by a nonresident enterprise of its equity interest in a PRC entity to its wholly owned subsidiary (another nonresident enterprise), provided that there is reasonable business purpose, the equity interest transfer is at least 75 percent of total equity in the PRC entity, the consideration in equity is at least 85 percent of total consideration, the withholding tax rate applicable to the gain on the future disposal of such equity interest is not reduced, and the nonresident transferor makes a written promise to the tax authorities that it will not dispose of its interest in the nonresident transferee within three years of the re-organization. Announcement 72 contains the following clarifications:
- An equity transfer of a PRC entity resulting from an offshore merger or de-merger of its nonresident enterprise shareholders should fall within the scope of this type of transfer.
- The transferor should make a filing within 30 days of the effectiveness of the equity transfer agreement and the completion of business registration with respect to the equity transfer. Previously, the filing was due only upon the filing of the PRC company's annual corporate income tax return, the deadline of which typically is on May 31 following the fiscal year.
- Where the special reorganization tax treatment has been elected, if the applicable withholding tax rate on dividends under the tax treaty between China and the transferee's country (region) is lower than that between China and the transferor's country, the retained earnings of the PRC entity accumulated prior to the transfer will not be entitled to any reduction in the dividend withholding tax rate.
The filing deadline provided in Announcement 71 also applies to a transfer by a nonresident enterprise of its shareholdings in a PRC entity to its 100 percent owned PRC subsidiary (PRC tax resident). If the special reorganization tax treatment is elected, the transferee should file with the tax authority within 30 days of the effectiveness of the equity transfer agreement and the completion of business registration with respect to the equity transfer.
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