China (PRC)

Multilateral Competent Authority Agreement on automatic exchange of Information

On 16 December 2015, the PRC became the 77th jurisdiction to join the OECD Automatic Exchange of Information Agreement (2014) (MCAA) on the introduction of the automatic exchange of information in tax matters on a reciprocal basis. China will exchange information automatically based on the international standard developed by the OECD.

Construction project, real estate and finance sectors

At a meeting of the Ministry of Finance on 28 December 2016, the Minister of Finance stated that the transformation of business tax to VAT, which started in 2012, will be extended in 2016 to include the construction, real estate, and financial and consumer service sectors. These are the remainder of the most important sectors currently subject to business tax. Details will be published in due course.

Individual income tax deduction for health insurance premiums

The Ministry of Finance, State Administration of Taxation and China Insurance Regulatory Commission jointly issued a notice (Cai Shui [2015] No.126) concerning the implementation of the individual income tax policy on deduction for health insurance premiums. This was announced in an earlier notice (Cai Shui [2015] No.56) in May 2015.

The policy will be introduced as a trial project in Beijing, Shanghai, Tianjin, Chongqing and 27 other major cities. The notice Cai Shui [2015] No.126 provides that from 1 January 2016 an annual amount of CNY2,400 (CNY200 per month) paid by employees, sole proprietors or partners of a partnership to a qualified commercial health insurance scheme is, in addition to the monthly standard deduction, deductible for individual income tax purposes.

Transfer pricing agreements

The State Administration of Taxation (SAT) released the China Advance Pricing Agreement (APA) Report of 2014 on 21 December 2015. According to the report, 9 APAs (3 unilateral and 6 bilateral) were concluded in 2014. The total number of APAs entered into in 2014 is considerably less than the previous year in which 19 (11 unilateral and 8 bilateral) were concluded. Both Chinese and English versions can be downloaded from the website of the SAT.

VAT exemption for cross-border e-commerce in Hangzhou

On 18 December 2015, the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) jointly issued a notice (Caishui [2015] No.143) concerning the value added tax (VAT) exemption policy applicable to the export of goods through e-commerce in the cross-border e-commerce pilot area of Hangzhou (this is the city in which China's largest e-commerce enterprise, Alibaba, is located).

Goods exported by enterprises located in Hangzhou without any valid purchase certificates being issued are exempt from VAT until 31 December 2016, provided that the following conditions are satisfied:

  • the exported goods are supervised by what is known as a 'Single Window platform'; and
  • export enterprises keep accurate records of the information available on the suppliers of the exported goods.

Taxation of income from qualified investment funds

The Ministry of Finance (MoF), the State Administration of Taxation (SAT) and the China Security Supervision Committee jointly issued a notice (Cai Shui [2015] No. 125) on 14 December 2015 concerning the taxation of mutually recognised investment funds in mainland China and Hong Kong. The notice applies from 18 December 2015 and its content is summarised below.

Capital gains on the trading of participations in Hong Kong investment funds realised by Chinese domestic individuals through recognised funds are exempt from individual income tax in the period from 18 December 2015 to 17 December 2018. However, the income derived by Chinese domestic individuals from investment funds in Hong Kong through recognised funds is subject to individual income tax at a rate of 20 percent, which is to be withheld by agents maintained in mainland China by Hong Kong investment funds.

Both capital gains and income are taxable under enterprise income tax if such gains and income are derived by Chinese domestic enterprises from investment funds in Hong Kong through recognised funds.

Conversely, capital gains on the trading of participations in mainland China investment funds realised by Hong Kong individuals or enterprises are exempt from income tax. However, dividends distributed by Chinese domestic listed companies to Chinese domestic investment funds are subject to a 10 percent withholding tax, and listed companies are required to withhold the tax on distributions pertaining to Hong Kong investors (individuals or enterprises). If the distribution concerns interest on corporate bonds, the withholding tax is 7 percent. At the time that a Chinese domestic investment fund distributes the gains or income to Hong Kong investors, no withholding tax will be imposed.

Further, the notice states clearly that no business tax will be imposed on capital gains derived through recognised funds. As regards stamp duty, only Chinese domestic investors are subject to Hong Kong stamp duty on transactions relating to participations in investment funds in Hong Kong. Conversely, Hong Kong investors are exempt from stamp duty on transactions relating to participations in Chinese investment funds in China.

Stock incentives and conversion of retained earnings/profits

The State Administration of Taxation (SAT) issued an announcement on 16 November 2015 (SAT Gong Gao [2015] No. 80) clarifying the individual income tax treatment of stock incentives as provided in Cai Shui [2015] No. 116 that stipulates certain tax incentives for National Innovation Demonstration Zones. The announcement applies from 1 January 2016 and its content is summarised below.

The individual income tax base of stocks must be calculated by reference to the fair market value at the time the stocks are received by employees. For listed companies, the fair market value is the closing price of the stock on that day; and for non-listed companies, the value must be ascertained on the basis of net asset method, comparable method or other reasonable methods which can be applied in consultation with the tax authority. The value is included in the taxable income of the employee as salary and wages.

Non-listed companies that convert undistributed profits, retained earnings and mandatory accumulation of profits to stocks for distributions to individual shareholders are required to withhold individual income tax on stock dividends. If the stocks (as stock dividends) are distributed by a listed company, the tax treatment of dividends from listed companies depending on the holding period of the underlying shares will apply.

On the basis of Cai Shui [2015] No. 116, employees receiving stocks and shareholders receiving stock dividends may pay the individual income tax over a period of five years if certain requirements are satisfied. The company granting or distributing the stocks must file the tax payment in instalments with the competent tax authority by submitting certain documents such as certification of high-technology enterprise, the resolution of a general meeting of shareholders on such plans, stock valuation reports and financial statements of the company.

Stamp duty on financial leasing contracts

The Ministry of Finance and the State Administration of Taxation (SAT) jointly issued a notice concerning stamp duty on financial leasing contracts on 24 December 2015 (Cai Shui [2015] No. 144). The notice applies from its issuance date. According to the notice, financial leasing contracts, including sale-and-leaseback contracts, are subject to stamp duty at a rate of 0.05 percent of the total lease amount. Under sale and leaseback arrangements, the sale and repurchase of assets by the lessor or lessee are exempt from stamp duty.

Tax policy measures to comply with WTO rules published

The State Administration of Taxation (SAT) issued a notice on 10 October 2015 (Shui Zong Fa [2015] No. 117) concerning interim measures on compliance issues relating to tax policies. The notice applies as from 1 November 2015.

For the purposes of this notice, "tax policies" are understood to mean tax rules and regulations affecting trade services and transactions involving intellectual property. For example, tax policies affecting import and export include indirect taxes on import, export duties, export tax refunds and tax reductions for processing industries, as well as other tax incentives for trade.

In the context of the notice, "compliance" means that tax policies have to be in conformity with the rules of the World Trade Organisation (WTO). When introducing a new tax policy, the tax policy department is required to examine if the policy complies with:

  • the most-favoured-nation treatment;
  • national treatment;
  • transparency;
  • regulations on subsidies and state aid; and
  • other WTO rules.

The central legislative and policy department of the tax authority has to conduct a compliance assessment on the draft tax policy and provide feedback to the policymaking department.

Convention and protocol on Mutual Administrative Assistance in Tax Matters

On 16 October 2015, China deposited its instrument of ratification for the multilateral Convention on Mutual Administrative Assistance in Tax Matters, as amended by the 2010 protocol. The Convention and the amending protocol will enter into force three months after the instrument of ratification has been deposited. Further details will be reported subsequently.

International tax developments

ASEAN

On 22 November 2015, the Association of Southeast Asian Nations (ASEAN) and China signed an amending protocol to the 2004 free trade agreement (FTA) between ASEAN and China, following a successful fourth round of negotiations.

Hong Kong

Corporate treasury centre tax incentive

The Inland Revenue (Amendment) No.4 Bill 2015 was gazetted on 4 December 2015 to introduce a concessionary profits tax rate of 8.25 percent (compare Singapore: 10 percent) for certain profits derived by a qualifying corporate treasury centre in Hong Kong. This bill also enhances interest expense deduction rules for an intra-group financing business carried on by a corporation, and it will deem the interest income and certain profits derived from such business as taxable trading receipts. Finally, the bill clarifies the Profits Tax and stamp duty treatment of regulatory capital securities issued by financial institutions in compliance with Basel III capital adequacy requirements.

The bill was introduced to the Legislative Council on 16 December 2015 where it will be discussed and – as expected – approved before being enacted into law. Once enacted, the provisions are expected to apply from 1 April 2016.

Interested parties should review their current corporate treasury operations to examine whether the arrangements under the bill will be beneficial to them.

Guidance on tax treatment of Amalgamations

On 30 December 2015, the Hong Kong Inland Revenue Department (IRD) issued a Guidance concerning the tax treatment of profits in a court-free amalgamation. Hong Kong's new Companies Ordinance (Cap.622), which became effective on 3 March 2014, introduced the court-free amalgamation regime to facilitate an amalgamation of two or more wholly-owned intra-group companies without a preliminary court approval. However, there have been no amendments made to the Inland Revenue Ordinance (IRO) to reflect the new court-free amalgamation regime, nor has the IRD provided guidance on the tax treatment of court-free amalgamation, which leads to considerable tax uncertainties.

According to the Guidance, if the Commissioner is satisfied that the court-free amalgamation is not carried out for the purpose of obtaining tax benefits, the provisions in sections 61A or 61B of the IRO will not be applicable to the amalgamation (e.g. the denial of losses carried forward from the merging company to the merged company) and the merged company will be regarded as the continuation of the merging company for the purposes of the IRO.

The IRD is considering making amendments to the IRO to provide a statutory framework for the court-free company amalgamation. Before the amendments are enacted, the Assessor will make an assessment in accordance with the following practice:

  • Amalgamation with sale of assets: if a court-free amalgamation is structured with a sale of assets on an arm's-length basis, the provisions concerning sale of assets will be applied to assess any deemed trading receipts and to make balancing adjustments.
  • Amalgamation without sale of assets: the merging company will be treated on the day before the amalgamation as having:

    • ceased to carry on its trade, profession or business; and
    • realised its trading stock in the open market.

The merged company will be treated on the effective date of amalgamation as having:

  • continued to carry on the trade, profession or business of the merging company by way of succession;
  • qualified for annual allowances in respect of commercial/industrial buildings or structures by way of its entitlement to the relevant interests (however, the disposal of such interests will be subject to balancing charges);
  • qualified for annual allowances in respect of machinery or plant by reference to the reducing values of unclaimed allowances (however, the disposal of machinery or plant will be subject to balancing charges);
  • qualified for any unexpired allowances/deductions in respect of capital expenditure incurred by the merging company (however, the disposal of such capital assets will be subject to the assessment of proceeds as trading receipts on sale);
  • entitled to deductions that the merging company would have been allowed but for the amalgamation; and
  • taken over the amount that would have been income or trading receipt of the merging company but for the amalgamation.

Tax losses of a company cannot be transferred to other group companies. Group loss relief and deduction for acquired losses through the court-free amalgamation procedure are not allowed. However, tax losses can be used to set off against profits of the merged company in the following situations:

  • tax losses are incurred after both the merging and the merged company have become wholly owned subsidiaries of the same group;
  • tax losses are carried forward by the merging or merged company in a trade or business, which continues until amalgamation:

    • if tax losses are brought forward in the merged company, the merged company has adequate financial resources (excluding intra-group loans) to purchase the trade or business of the merging company even if the amalgamation is not conducted; and
    • if tax losses are brought forward from the merging company, such losses can only be used to set off against the profits of the merged company derived from the same trade or business succeeded from the merging company.

If tax losses available for setting off are considerably large, the merging and merged company should consider applying for an advance ruling under section 88A of the IRO.

In addition, the Guidance also clarifies the rights and obligations of the merged company.

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