The term "beneficial owner" has been used in various
tax treaties between mainland China and other foreign countries
(including the double taxation arrangements with Hong Kong and
Macao) and the status is often a pre-requisite for non-resident
enterprises claiming preferential tax treatment in the PRC.
For the purpose of determining the "beneficial owner",
the State Administration of Taxation ("SAT") issued a
circular number 601(Guoshui han  number 601) on 27 October
2009 ("Circular"), which Circular will affect foreign
investors wanting to claim preferential tax and repatriate
proceeds out of the PRC.
Meaning of Beneficial Owner
A "beneficial owner" is defined in paragraph 1 of the
Circular as a person or an entity which has the ownership and right
to control income or the assets or rights generating income. The
Circular emphasizes that a beneficial owner shall engage in
substantive business activities.
The Circular expressly provides that agents or conduit companies
will not be regarded as beneficial owners and therefore will not
qualify for benefits under any tax treaties. It further
clarifies that conduit companies refer to companies incorporated
for the purpose of avoiding or reducing tax, transfer or
accumulation of profits. Such companies, according to the Circular,
do not engage in substantial activity such as manufacturing, sales
or management and are only to "satisfy their incorporation
In determining whether an entity is a beneficial owner,
paragraph 2 of the Circular sets out seven factors which could
negatively affect an applicant's status as a beneficial owner
the applicant is obliged to distribute or pay all or majority
of its income (more than 60%) to a resident in a third country
within a fixed time period (such as 12 months of receipt);
the applicant does not have any business activities except the
holding of rights or assets generating income;
for a corporate entity, its assets, size and staff arrangement
do not commensurate with its income;
the applicant has no or minimal control over its income, assets
or rights and does not take any business risk;
the relevant income of the applicant is non-taxable or subject
to a low tax rate in the contracting country;
in the case of payment of interest under a loan agreement, the
existence of another loan or deposit agreement between the lender
and a third party; and the amount, interest rate and the time of
conclusion of the third party contract are similar to those of the
first loan agreement; and
in the case of royalty income, the existence of another
agreement on copyright, patent and technology licensing or transfer
between the applicant and a third party, in addition to the royalty
The Circular however does not indicate the weight of each of the
above factors when determining the beneficial owner.
The Circular poses new challenges to holding companies or
special purpose vehicles, which have no manufacturing, sales, or
management activities but still wish to apply for tax treaty
benefits. Typical securitization vehicles would also encounter
difficulties claiming treaty benefits given its obligation to
distribute income regularly. Further actions may now be required to
establish a substantive company to support its claim as a
beneficial owner, such as arranging for personnel or operating
assets to be injected into the holding company, capitalising the
company with sufficient equity and/or avoiding back to back
arrangements. Non-resident companies are advised to review
its corporate structure and keep it in line with the Circular.
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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