China: Clarification on non-resident enterprises electing for special tax treatment of Chinese equity interest transfers
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China: Clarification on non-resident enterprises electing for special tax treatment of Chinese equity interest transfers

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Khoonming Ho


Lewis Lu

The State Administration of Taxation issued Announcement 72 on December 12 2013 to provide more specific guidance on the recordal filing requirement for special tax treatment of certain cross-border corporate re-organisation involving Chinese equity interest transfers. Under the corporate income tax (CIT) regime, cross-border re-organisations satisfying a specific set of criteria may qualify for special tax treatment in the form of the deferral of CIT for gains derived, if any. Announcement 72 deals with two types of qualifying transfer by non-resident enterprises specified in previous Circular 59 if specific conditions are met:

  • Type one foreign-to-foreign transfer: Transfer by a non-resident enterprise of its shareholdings in a Chinese entity to its wholly-owned (100%) subsidiary (another non-resident enterprise) may qualify for the special tax treatment provided that the WHT rate applicable to the gain on the future disposal of such shareholdings is not reduced, and that the non-resident transferor makes a written promise to the tax authorities that it will not dispose of its interest in the non-resident transferee within three years of the re-organisation. Announcement 72 further clarifies that an equity transfer of Chinese entity resulting from an offshore merger or de-merger of its non-resident enterprise shareholders shall fall within the scope of the Type 1 qualifying transfer.

  • Type two foreign-to-China transfer: Transfer by a non-resident enterprise of its shareholdings in a Chinese entity to its wholly-owned (100%) Chinese subsidiary (Chinese tax resident).

Announcement 72 also stipulates that subsequent to a type one qualifying transfer where specific tax treatment has been elected, the retained earnings of the Chinese entity accumulated before being transferred shall not be entitled to any reduction in dividend withholding tax (WHT) rate as accorded under the relevant tax treaty between China and the transferee's (that is the new shareholder's) jurisdiction if dividend is distributed after the transaction. This measure is designed to prevent any conferment of dividend WHT advantages that may be derived from a qualifying restructuring and codifies what tax authorities sometimes require in practice.

Another noteworthy point is that Announcement 72 removes the requirement stipulated in previous Circular 698 that the application for special tax treatment be approved by the local tax authorities at the provincial level. The approval requirement has been replaced by a recordal filing procedure. Such recordal filing shall be completed within 30 days from the effective date of equity transfer agreement and upon completion of the requisite government approval procedures for changing of shareholder.

Foreign investors should monitor further guidance on the above, and carefully evaluate the potential tax implications and exposure of any cross-border intra-group re-organisation before actual implementation.

Khoonming Ho (khoonming.ho@kpmg.com)

KPMG, China and Hong Kong SAR

Tel: +86 (10) 8508 7082

Lewis Lu (lewis.lu@kpmg.com)

KPMG, Central China

Tel: +86 (21) 2212 3421

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