On 10 December 2009, the State Administration of Taxation issued
a circular on strengthening enterprise income tax
("EIT") administration on gains from
equity transfers by foreign non-resi¬dent enterprises
Circular 698 not only provides for a capital gains tax on direct
transfers of equity of a PRC-resident enterprise by its
non-resi¬dent shareholder, it also strengthens tax oversight on
the indirect transfer of equity of an offshore intermediary holding
company that owns a PRC-resident enterprise. As such, it increases
admin¬istration and control over foreign enterprises that use
offshore holding companies to invest in China.
Two of the provisions under Circular 698 that may create
practical difficulties are described below.
If the withholding agent fails to fulfil its withholding
obligations concerning the equity transfer, the non-resident
shareholder shall be required to declare and pay EIT within seven
days after the contractual date of equity transfer, or when the
equity transfer gains are received if this occurs at an earlier
time. This timeline will be difficult to meet.
With indirect equity transfers, if the actual tax burden in the
jurisdiction of an offshore holding company being transferred is
less than 12.5%, or if there will be no income tax for
for-eign-sourced income in such jurisdiction, the actual
controlling non-resident investor must submit comprehensive
documents within 30 days after signing the equity transfer
contract. This tax burden will be difficult to assess, and the
timeframe and documentary requirements will be difficult to
Should the actual controlling foreign investor use the
intermediary holding company to evade taxes, the Chinese tax
authorities may disregard the existence of the offshore holding
company and redetermine the nature of the equity transfer.
Furthermore, Circular 698 is effective retroactively from 1
January 2008. Foreign investors who conducted an indirect equity
trans¬fer involving their Chinese companies over the last three
years should reexamine their transactions to ensure full compliance
with this 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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