Circular 698 – Indirect transfers of Chinese companies

Posted by Matthew on December 23, 2009 under Corporate Tax Planning | Be the First to Comment

Circular 698 is a Notice on Strengthening the Management of Enterprise Income Tax Collection of Proceeds from Equity Transfers by Non-resident Enterprises. The critical aspect of Circular 698 is that it requires foreign entities to disclose the indirect sale of Chinese enterprises – that is when a holding company that owns a Chinese enterprise is sold. The reason for this is that transfers of Chinese enterprises are subject to tax (in the case of foreign entities this is a 10% withholding tax). Notice of such a transfer (and stipulated documentation in respect of the transder) must be given to the Chinese tax authorities within 30 days of the agreement being signed.

Tax authorities in China had recently used China’s general anti-avoidance rule to the same effect (see the Chongqing and Xinjiang cases). However, this Notice is a far more direct approach and indicates the SAT’s aggressive position in respect of these types of transactions.

A translation of the Circular will be posted shortly. For now more information on Circular 698 can be found here.