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

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

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

ho.jpg

lu.jpg

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

more across site & shared bottom lb ros

More from across our site

Authors from Khaitan & Co dissect a ‘welcome’ ruling, which found that the mere existence of a tax benefit would not, by itself, warrant a principal purpose test
Over two-thirds of survey respondents back the continuation of the UK’s digital services tax, research commissioned by the Fair Tax Foundation also found
Given the US/G7 pillar two deal, the OECD is in danger of being replaced by the UN as the leading global tax reform forum
Cinven’s latest investment follows its acquisition of a stake in Grant Thornton UK in December; in other news, a barrister listed by HMRC as a tax avoidance promoter has alleged harassment
CIT base narrowing measures remain more prevalent than increased CIT rates, the report also highlighted
ITR's parent company, LBG, will acquire The Lawyer, a leading news, intelligence and data-driven insight provider for the legal industry, from Centaur Media
KPMG UK’s Graeme Webster and KPMG Meijburg & Co’s Eduard Sporken outline the 20-year evolution of MAPAs, with DEMPE analyses becoming more prevalent and MAPA requirements growing stricter
Rishi Joshi, of the Institute of Chartered Accountants of India, warns of potential judicial overreach as assets are recharacterised to bypass a legislative exclusion
Only 2% of in-house survey respondents said they were ‘heavy’ users of AI for TP, Aibidia’s report also found
There was a ‘deeply embedded culture within PwC that routinely disregarded formal confidentiality obligations,’ the chairman of Australia’s Tax Practitioners Board said
Gift this article