Circular 698 has been put into practice in China

Posted by Shi Zhiqun on July 13, 2010 under Uncategorized | Be the First to Comment

On 18 May, 173 million RMB of non resident enterprise income tax which was declared by certain transnational investment group had been put in storage in Jiangdu National Tax Bureau in Jiangsu Province. This is another case concerning tax issues of indirect equity transfer after 2008 Chongqing case, and also the first case after the Circular 2009 No. 698 (hereafter referred to as “the Circular”) came into force. Meanwhile, to date, the sum of tax payment is definitely the largest one. More than that, it means, ever since the issuing of the Circular, China tax authority put taxing on indirect equity transfer into the practice stage.

CASE

Hereafter is the details of the meaningful case.

In January 2010, a certain transnational investment group (hereinafter referred to as C) indirectly transferred the equity of a China joint venture company (49%) by disposing its shares (100%) in a Hong Kong intermediate holding company.

Jiangdu National Tax Bureau paid every attention to the whole progress. Soon afterwards, using the first hand materials obtained by negotiation with company C, Jiangdu National Tax Bureau made an elementary judge that company B was a kind of company aiming at special purpose, while without any employees, assets, liabilities, investment other than 49% interest in the Chinese cimpany,or real operating activities.. Under the guide of superior tax authority, Jiangdu National Bureau began rounds and rounds tough negotiation with company C and its agents. Finally, company C agreed to contribute non resident enterprise income tax on amount of equity transfer.

 

COMMENTS

The legal basis of the above case is the Circular, which was issued on Dec 10^th, 2009 and coming into effect on the date 1^st Jan 2008. The Circular clarifies the relevant tax issues on non resident equity transfer income, and provides that under certain conditions, overseas investors who indirectly transfer the equities of domestic resident company shall submit materials to China tax authority as an obligation. Under the examining and verifying by SAT, indirect transfer can be re-determined according to economic substance, and the overseas intermediate company can be denied as an existence for tax arrangement. This shows the China tax authority’s determination in preventing overseas enterprise avoiding tax obligation in China by indirect equity transfer. The Circular provides policy basis for taxing on indirect equity transfer, and it should be followed in similar cases in the future.