In October 2009, the State Administration of Taxation of China
for the first time formally issued a circular providing guidance on
the relevant factors for determining whether or not a recipient of
income is considered to be the beneficial owner
("Circular 601"). However, uncertainty
remained in certain aspects. This is why the State Administration
of Taxation of China issued an announcement on 29 June 2012
providing further clarification on China's interpretation of
the concept of beneficial ownership (the
Beneficial ownership is an important concept in international
tax law and especially for the application of double taxation
agreements ("DTAs"). Most DTAs provide
that a recipient of an income item is only entitled to an exemption
from or reduction of (withholding) taxes on that income item if the
recipient is the beneficial owner of that income item. As the term
'beneficial owner(ship)' is not defined in most DTAs, many
countries, including China, interpret the term under their domestic
One of the most important features of the Announcement is the
safe harbour provision on treaty qualification for listed companies
and their subsidiaries. This provision prescribes that the
beneficial owner status of a company resident in a treaty country
that derives dividend income from China can be confirmed without
further verification if that company is:
listed on a stock exchange in that treaty country, or
100% controlled by a company that is listed on a stock exchange
and tax resident in the same treaty country.
Because the safe harbour provision requires a listed company and
its fully controlled subsidiaries to be resident of the same
country, it will not provide any certainty in respect of the
beneficial owner status to structures in which a foreign listed
company invests in China through a third-state holding company.
Furthermore, the Announcement stresses the importance of the
reliance on all relevant documents for the Chinese tax authorities
in making such an analysis. Therefore, it is advisable that foreign
investors that derive income items from China keep all documents
that may be relevant in order to benefit from their beneficial
owner status under Chinese DTAs. These documents include financial
statements, records of cash movement, board meeting minutes,
relevant contracts, and certificates or documents that can
substantiate the ownership of certain assets
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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