Circular 698 tax on capital gain from share transfers by non-resident companies
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Tax on capital gain from share transfers by non-resident companies
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- 1. Tax on Capital Gain from Share Transfers by Non-Resident
Companies Mar 31, 2011 Beijing Shanghai Tianjin Guangzhou Chengdu
Hongkong Taipei Singapore NewDelji Copenhagen Zurich
- 2. Agenda
- Part 2 - Case Study ( Jiangdu Case & Others)
- Part 3 - Impact on Non-resident investors
- Part 4 Calculation of IIT
- Part 1 - Tax Circular 698
Beijing Shanghai Tianjin Guangzhou Chengdu Hongkong Taipei
Singapore NewDelji Copenhagen Zurich
- 3. Tax Circular 698
- Guoshuihan [2009] No.698 (Circular 698)
- - Capital gain tax will be imposed by the tax authority if the
gain is derived from source of China. In the past, there was no
capital gain tax on transfer of share in overseas.
-
- New tax rule had been released in 12/2009 & took effective
retroactively from Jan 2008
-
- - provide general guidance on the reporting requirements on
share transfer (direct transfer / indirect transfer)
-
- Not applicable to listed Chinese company
Beijing Shanghai Tianjin Guangzhou Chengdu Hongkong Taipei
Singapore NewDelji Copenhagen Zurich
- 4. Tax Circular 698
- There are 2 situations in relation to offshore share
transfer:
-
- Situation 1: Direct transfer
-
- Offshore holding company hold and transfer the share of china
company directly
-
- Situation 2: Indirect transfer
-
- More parties may involve, ultimate share holding company
transfer the share of china company via another company
Beijing Shanghai Tianjin Guangzhou Chengdu Hongkong Taipei
Singapore NewDelji Copenhagen Zurich
- 5. Situation 1 Situation 1 Direct transfer Sale Offshore
Onshore Holding Company Company A China Company Non-resident
Company B
- The seller (Non-resident Company A) should
- Perform the tax filing with PRC tax authority in-charge either
by itself or through a tax agent.
- Submit a copy of share transfer agreement
- Within 7 days after the share transfer agreement is
concluded
Beijing Shanghai Tianjin Guangzhou Chengdu Hongkong Taipei
Singapore NewDelji Copenhagen Zurich
- 6.
- Capital gain earned by Non-resident Company A is a passive
income, which is sourced from China .
- Capital gain = Income from share transfer (paid in cash,
non-monetary assets or equity) cost of the shares
- Therefore, capital gain = accumulated profit (after tax)
Situation 1 Direct transfer Beijing Shanghai Tianjin Guangzhou
Chengdu Hongkong Taipei Singapore NewDelji Copenhagen Zurich
- 7. Situation 2 Indirect transfer Situation 2 Ultimate Holding
Company X China Company Offshore Holding Co. Z Offshore Onshore
Sale Non-resident Company Y
- The seller (Non-resident Company X) -
- Whether the tax rate in the country of offshore company lower
than 12.5% or capital gain tax exempted ?
- Answer is Yes -> should submit a copy of share transfer
agreement to tax authority (who is in charge of the China
company).
- Within 30 days after the agreement is concluded.
Beijing Shanghai Tianjin Guangzhou Chengdu Hongkong Taipei
Singapore NewDelji Copenhagen Zurich
- 8. Situation 2 Indirect transfer
- Following documents (altogether with the share transfer
agreement ), required by the PRC tax authority, shall be submitted
to complete the tax registration.
-
- Relationship between the Ultimate Holding Co and the offshore
Holding Co
-
- (in relation to funding, personnel and sales and purchase,
etc)
-
- Relationship between the offshore Holding Co and the China
company (ditto)
-
- Business operation, personnel, accounts, properties, etc. of
the Offshore Holding Co
-
- Statement regarding to bona fide commercial purposes of the
incorporation of the offshore Holding Co -------intention
-
- Other documents required/relevant
Beijing Shanghai Tianjin Guangzhou Chengdu Hongkong Taipei
Singapore NewDelji Copenhagen Zurich
- 9. Situation 2 Indirect transfer
- Whether the business structure has bona fide Commercial purpose
?
- If PRC tax authority considers the business structure has NO
commercial purpose , the offshore holding Co. may be regarded as a
shell company , and its existence be denied from tax
perspective.
- Indirect Transfer (Situation 2) - > Direct Transfer
(Situation 1).
- The offshore Seller (Company A) transfers the shares of a China
company to the offshore Buyer (Company B).
- The offshore Seller (company A) would be taxed.
Beijing Shanghai Tianjin Guangzhou Chengdu Hongkong Taipei
Singapore NewDelji Copenhagen Zurich
- 10. Situation 2 Indirect transfer
- According to General Anti-tax avoidance rule (GAAR)
- Tax authority has the right to make adjustments with reasonable
methods, where a company makes business without bona fide
commercial purposes which result in reducing or deferring its
revenue or taxable income.
Beijing Shanghai Tianjin Guangzhou Chengdu Hongkong Taipei
Singapore NewDelji Copenhagen Zurich
- 11. Case study Jiangdu case
- In June 2007, an offshore Investor (a famous US investment
fund) acquired the shares of a China JV company, through its HK
subsidiary. And, in early 2009, the offshore Investor plans to
dispose the shares.
- Jiangdu State Tax Bureau monitored the transaction, and
reported to PRC State Administration of Taxation (SAT).
- Tax authority finally concluded that the HK holding Co has no
business substance and its existence shall be denied.
- The reason is - The HK holding Co. did not have any employees,
assets/liabilities, investments, but the shares in the China
company.
Ultimate Holding Company A China JV Company - C (located in
Jiangdu) HK Holding Company Offshore Onshore Sale PRC Investor US
Buyer - B 49% 51% Beijing Shanghai Tianjin Guangzhou Chengdu
Hongkong Taipei Singapore NewDelji Copenhagen Zurich
- 12. Case study Jiangdu case Beijing Shanghai Tianjin Guangzhou
Chengdu Hongkong Taipei Singapore NewDelji Copenhagen Zurich
Timeline Progress (step by step) In early 2009 Jiangdu tax
authority learnt from a JV i.e. Company C during a common tax
administration review, that its foreign investor Company A may want
to dispose its shares in the JV through an indirect offshore share
transfer. As there is no tax regulations on the indirect share
transfer, Jiangdu tax authority reports this case to the State
Administration of Taxation (SAT). 10th Dec. 2009 SAT released
Circular 698 to clarify the taxation on indirect offshore share
transfer. 14th Jan, 2010 Company A transferred its shares of
Company B to a US buyer, and obtained the huge amount of capital
gain. 18th May, 2010 After several rounds of meeting and
negotiation, Company A agrees to pay tax of RMB173 million
(equivalent to USD25.4 million ).
- 13. Case study others Currency: RMB Beijing Shanghai Tianjin
Guangzhou Chengdu Hongkong Taipei Singapore NewDelji Copenhagen
Zurich City in China Transaction Time Capital gain Withholding
income tax (WHT) Da Lian Mar 2009 860.0 million 60.50 million He
Nan July 2009 115.5 million 10.09 million Xiao Shan Aug 2009 31.2
million 3.12 million Liao Ning Dec 2009 11.2 million 1.12 million
Zhe Jiang Apr 2010 101.7 million 10.17 million
- 14. Impact on Non-resident investors
- - Foreign investors in BVI, HK etc (effective tax rate <
12.5%) may be obligated to report to PRC tax authority.
- GAAR (general anti-tax avoidance rules)
Beijing Shanghai Tianjin Guangzhou Chengdu Hongkong Taipei
Singapore NewDelji Copenhagen Zurich
- 15.
- Trends of offshore share transfer
-
- Holding Co. is with commercial purpose and substance of
business.
-
- Foreign investor be individual
-
- Enjoy the preferential tax treaty benefits
Impact on Non-resident investors Cond Beijing Shanghai Tianjin
Guangzhou Chengdu Hongkong Taipei Singapore NewDelji Copenhagen
Zurich
- 16. Contact Us
- Tel.: Beijing: (8610) 8447 8118
- Tel.: Shanghai: (8621) 5169 9589
- Website: www.ncochina.com
Beijing Shanghai Tianjin Guangzhou Chengdu Hongkong Taipei
Singapore NewDelji Copenhagen Zurich