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China: Definition of beneficial owner under entrusted investments



Khoonming Ho

Lewis Lu

On April 21 2014, the State Administration of Taxation (SAT) released Announcement [2014] No.24 (Announcement 24) to clarify the definition of beneficial owner under "entrusted investments". Announcement 24 provides more detailed guidance to local tax authorities on how to determine the beneficial owner when non-residents invest in the PRC via entrustment with single- or multiple-layer collective investment structure. Announcement 24 defines "entrusted investment" as equity or debt investment by a non-resident with its own capitals through an overseas professional institution, which shall be approved by the home jurisdiction to conduct business in securities brokerage, asset management, capital and securities trust, and so on. However, the SAT did not clarify whether some investment vehicles (for example, private equity funds), which could be established without having necessarily gone through approval by regulatory bodies in their home jurisdictions, are included as "overseas professional institution" under the Announcement.

Announcement 24 clarifies different tax treatments on the income and gain derived from investments of non-residents as shown in Table 1.

Table 1

Type of the investment Income


Dividend or interest

If there has not been any changes to the nature of the income during each stage of distributions to the PRC non-residents and there is evidence showing that such income has actually been distributed to the PRC non-residents, the PRC non-residents could be recognised as beneficial owner of such income and could enjoy the treaty benefits

Charges or remunerations received by all other parties (except the PRC non-residents) in the investment chain

If such charges or remunerations are related to dividends or interests, the PRC non-residents should not be treated as the beneficial owner on such portion of charges or remunerations, and the treaty benefits on dividends or interests will not be applicable on such portion

Capital gains or other types of income not subject to beneficial owner test

Relevant clauses in the double tax treaty shall be followed

It is common practice for overseas professional institutions to use intermediate holding companies in countries or regions that have tax treaty with the PRC (for example, Hong Kong or Singapore) to hold shares of PRC resident enterprises. It is unclear whether the tax authorities will cut through these intermediate holding companies and determine the beneficial owner based on the ultimate beneficial owner of the investment.

In addition, Announcement 24 sets out stringent documentation requirement to enjoy treaty benefits. Many investors may be reluctant to reveal highly detailed and confidential information, rendering it difficult to obtain approvals from various parties in the investment chain for submitting to the tax authorities. It is therefore probable that non-residents are prevented from enjoying treaty benefits because they fail to meet the documentation requirement.

Khoonming Ho (

KPMG, China and Hong Kong SAR

Tel. +86 (10) 8508 7082
Lewis Lu (

KPMG, Central China

Tel: +86 (21) 2212 3421

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