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Khoonming Ho |
Lewis Lu |
In 2009, the State Administration of Taxation (SAT) of China (PRC) issued Guoshuihan [2009] No.601 (Circular 601) to address the beneficial ownership issue in the context of PRC double taxation agreements (DTAs). Circular 601 states that a non-resident recipient of certain China sourced passive income must be the beneficial owner of such income to enjoy the relevant PRC treaty benefits. Circular 601 then sets-out a series of adverse factors that will be considered by the PRC tax authorities in determining whether the non-resident recipient is the beneficial owner. Practical ambiguities have arisen in the application of the adverse factors during the tax authorities' review process. On June 29 2012, the SAT released Announcement [2012] No.30 (Announcement 30) to clarify the application of Circular 601. Announcement 30 confirms that beneficial ownership assessment should be made based on a totality of factors, and taxpayers cannot use a lack of tax avoidance motive as an argument to escape from applying the factors. The importance of reviewing various legal and financial documents in the process is also emphasised.
Announcement 30 prescribes a safe harbour for beneficial ownership determination. If a company is a tax resident of a DTA partner state and is listed in that jurisdiction, it will automatically satisfy the beneficial ownership criteria in respect of PRC dividends received. The same may also apply to foreign subsidiaries that are wholly owned by a listed foreign parent in a DTA partner state in certain situations.
In cases where an agent or designated payee receives income for a principal, Announcement 30 says that this should not prevent the principal from being identified as the true beneficial owner. For the principal to claim beneficial owner status, the agent is required to disclaim its beneficial ownership of the China-sourced income. This agent-principal provision will be of particular interest to Qualified Foreign Institutional Investors and their clients with PRC investments.
Finally, Announcement 30 provides that if a local PRC tax bureau rejects a DTA relief claim on the grounds that a foreign investor lacks beneficial ownership, the local tax bureau must obtain approval from the provincial tax bureau. Where approvals for DTA claims are needed from several tax bureaus, these tax bureaus shall work together to reach a unanimous decision. These new measures will serve to diminish inconsistencies in practice.
In all aspects, Announcement 30 is great news for MNCs with existing or future Chinese operations. It follows international common practice and grants automatic qualification to MNCs that are publicly traded in contracting states. It adopts the substance-over-form doctrine and allows a foreign investor to directly seek PRC DTA benefits even if an agent of the foreign investor receives incomes from China in form. It refines the administrative procedures to standardise the beneficial ownership review process and reduces arbitrariness in DTA application review. It is hoped that future guidance will build on the aforementioned clarifications to further enhance the beneficial ownership assessment process.
Khoonming Ho (khoonming.ho@kpmg.com), China and Hong Kong SAR & Lewis Lu (lewis.lu@kpmg.com), Central China
KPMG China
Tel: +86 (10) 8508 7082 & +86 (21) 2212 3421
