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
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
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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