China: Chinese Tax Authorities will recently commence tax cleaning-up activities targeting incomes of QFIIs/RQFIIs

Last Updated: 30 March 2015

On 31st October, 2014, the Ministry of Finance, State Administration of Taxation (SAT) and China Securities Regulatory Commission jointly published Cai Shui [2014] No.79 (Circular 79) to clarify enterprise income tax (EIT) policy for capital gains with respect to QFIIs/RQFII. Under Circular 79, QFIIs/RQFIIs are temporarily exempt from EIT on China-sourced capital gains derived from transfer of equity investment assets (including shares) effective from 17th November, 2014. However, at the same time, it provides that the abovementioned capital gains derived prior to 17th November, 2014 shall be subject to Chinese EIT.

On 26th February, 2015, a meeting regarding QFIIs/RQFIIs tax regime was held in Beijing by Asset Management Association of China. According to information delivered in the meeting, recently tax authorities in Beijing, Shanghai and Shenzhen would commence tax cleaning-up activities specifically targeting incomes derived by QFIIs/RQFIIs during the period from 17th November, 2009 to 16th November, 2014. The following is the scope covered by the activities.

The covered incomes include China-sourced dividends, interests and capital gains regarding transfer of equity investment assets derived by QFIIs/RQFIIs. Accordingly, transfer of investment asset in debt nature, including transfer of convertible bonds before conversion, is excluded from the scope of the activities. The meeting especially clarified that all incomes derived from transfer of mixed type of investment assets shall be treated as incomes derived from transfer of equity investment assets; the same treatment applies to transfer of convertible bonds after conversion.

The covered period begins from the date when QFIIs/RQFIIs were permitted to entry into the Chinese markets till 16th November, 2014, limited to a 5-year period permittth November, 2009 to 16th November, 2014. In other words,

  • where QFIIs/RQFIIs were permitted to entry into the Chinese markets prior to 17th November, 2009, the unpaid tax regardingy into the Chinese marketsth November, 2009 ande unth November, 2014, will be collected by tax authorities;
  • where QFIIs/RQFIIs were permitted to entry after 17th November, 2009, the unpaid tax regarding incomes derived during the date when QFIIs/RQFIIs were permitted to entry and the date of 16th November, 2014, will be collected.

From the tax administration and collection perspective, where there is no PE of the QFII/RQFII, the capital gain of each transaction shall be subject to withholding EIT at the rate of 10%. Off-setting between losses and profits with respect to different transactions is disallowed. Where the same product was acquired via several transactions, "first-in, first-out method" or "moving weighted average method" are available for calculation of tax basis. Besides, dividends, bonus profits and interest incomes are subject to 10% withholding EIT. Further, relevant institutions or beneficial owners may apply for preferential tax rates as provided in tax treaties. When collecting unpaid EIT, capital gains derived from transfer of equity investment assets are not charged late payment surcharges. As for dividends, bonus profits and interest incomes, such surcharges are imposed at 0.05% of the underpaid tax amount per day.

Our Observation

The tax treatment under Circular 79 clarifies previous doubt in relation to capital gains derived by QFII/RQFII, and the cleaning-up activities alsot to withholding, transfer of investment asset in debt nature, including transfer of convertible tration and collection perspective. However, possibly due to non-official announcement in the meeting, the currently well-known cleaning-up scheme still leaves some uncertain issues which should be clarified. Among others, the most important issues are about collection of unpaid tax and withholding tax obligation.

The covered period for collection of underpaid tax is of 5-year period, i.e. from 17th November, 2009 to 16th November, 2014. We understand that the 5-year term is actually based on Art. 52 of the Tax Administration and Collection Law. However, if taxpayers previously actively communicated with in-charge tax authority requesting to pay tax, while the tax authority clearly expressed that there was no need to pay due to lack of clear tax policy, in such case, it should be considered whether the 3-year period for collection underpaid tax under the same Art. 52 should apply. This issue reminds us that the Tax Administration and Collection is under amendment. It's worth thinking that, in the revision process, how to stipulate the collection period for underpaid tax and to make reasonable use of advance ruling system to reduce uncertainty for taxpayers in relation to tax treatment.

Besides, in the cleaning-up activities, capital gains will not be subject to late payment surcharges. This demonstrates from another perspective, that in circumstance where taxpayers sufficiently disclose transaction to and actively communicate with tax authorities, the treatment for exemption of late payment surcharges is justified. Such treatment provides guidance to similar situations in future, and is consistent with our understanding regarding where the revision of the Tax Administration and Collection Law will go.

Another matter that needs to be clarified is about determination of withholding agents and withholding obligation. For prudent considerations, in practice, custodian banks generally make a provision for 10% withholding tax. However, if the custodian bank failed to make the provision, it is a very important issue that how to determination withholding obligation afterwards under Circular 79 given that underlying payment has been made without withholding due to lack of clear tax rules at that time, especially, from the theoretical point of view, the buyer of underlying shares might be obliged to withhold. It is difficult in answering whether the withholding obligation and relevant punishment on failure to withhold should retroactively apply.

Furthermore, it should be noted that although the meeting clarified that QFIIs/RQFIIs may apply for tax treaty benefit, relevant tax treaties do not apply automatically. Taxpayers or their withholding agents still need to file their applications with the tax authorities to claim such benefits. QFIIs/RQFIIs may apply for tax treaty benefit, relevant tax treaties do not apprtainties in relation to the treaty benefit applications which need to be communicated with the tax authorities in advance:

  • The tax residency of QFII or RQFII. In most tax treaties, the registered place or the place of effective management is considered to determine the tax residency. However, unlike traditional business models, some QFIIs or RQFIIs operate in different places other than their registered places, places of management or places of decisions-making. In this regard, there might be additional complexity to determine the tax residency of a QFII or RQFII.
  • Choice of applicable tax treaty. Given that the unpaid tax retroactively collected arises in previous years, theoretically, the newly effective treaties (e.g. Ireland, Switzerland, and Netherland etc.) re-signed with China do not apply to the incomes derived prior to their effective days. However, since the tax obligation arises in current period, how relevant treaties apply might be an issue to be further communicated with the tax authorities in advance.

ABOUT US:

Our tax team has extensive experience assisting clients in tax planning, comprehensive tax solution and tax controversy resolution. We have represented clients in lots of projects, including M&A, security market investments, fund investments, banking, IP etc. We have been responsible for negotiation and communication with tax authorities in many complex tax dispute cases. We would be glad to provide one-stop services from both legal and tax perspectives with regards to your business operation or foreign direct investment in China, outbound investment, M&A, re-IPO business model optimization and tax planning, as well as act as your private tax advisor in personal fortune planning. We are also capable of providing creative and practical tax controversy resolution through in-depth legal and tax technical skill in combination with smooth communication with various tax authority in tax area.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions