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 [2009] 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 requirements".

Unfavourable Factors

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 :-

  1. 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);
  2. the applicant does not have any business activities except the holding of rights or assets generating income;
  3. for a corporate entity, its assets, size and staff arrangement do not commensurate with its income;
  4. the applicant has no or minimal control over its income, assets or rights and does not take any business risk;
  5. the relevant income of the applicant is non-taxable or subject to a low tax rate in the contracting country;
  6. 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
  7. 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 payment agreement.

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.