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China: Tax treaty relief on transferring land rich enterprises and substantial shareholding interests clarified

Khoonming Ho
Lewis Lu
On December 31 2012 the State Administration of Taxation (SAT) issued Announcement 59, clarifying the manner in which the capital gains tax articles of China's double tax agreements (DTAs) are to be applied.

The existing guidance on the application of the capital gains article in Chinese DTAs is set out in Circular Guoshuifa [2010] No.75 (Circular 75). Circular 75 streamlines the interpretation and application of the PRC-Singapore DTA and, by extension, DTAs entered into by China with other jurisdictions to the extent that their provisions are consistent with the China-Singapore DTA. Announcement 59 serves to complement Circular 75 in respect of the following two matters.

  • Transferring a "land rich" Chinese company. Chinese DTAs typically define a "land rich" Chinese company as one that directly or indirectly derives more than 50% of its value from Chinese immovable property. Announcement 59 clarifies that, in determining whether a Chinese enterprise derives its value largely from immovable property, liabilities of the enterprise are disregarded, and regard solely had to the enterprise assets (gross asset approach), which is generally consistent with the OECD commentary. Furthermore, Announcement 59 states that such determination should be made using the values of the enterprise assets as recorded in the financial statements prepared in accordance with PRC GAAP.
  • Transferring a Chinese company that is not "land rich". Circular 75 provides examples to illustrate how to determine whether the "25% shareholding threshold" is met and introduces the "significant interest relationships" notion. In a nut shell, direct ownership, indirect ownership and "constructive ownership" should be combined in deciding whether the 25% threshold is breached. Announcement 59 provides additional refinement in this regard, saying that indirect holdings need only be included in the calculation where the holding in the intermediate holding company, through which equity in the Chinese enterprise is held, is at least 10% of the total share capital of that company. Announcement 59 also defines more clearly, for both non-resident individual and corporate disposers of Chinese equity, who is to be considered to be related persons with "significant interest relationships". The 10% threshold for including indirect holdings in the Chinese enterprise is equally relevant in determining the holdings of such related persons.

The clarifications on the 25% threshold determination should be viewed as helpful, as the definition of persons with "significant interest relationships" is now more precise, and the need to consider every minor holding in the Chinese enterprise (whether held indirectly by the disposer itself or constructively held) is mitigated by the exclusion o those indirect holdings through intermediate holding companies of which less than 10% are held.

However, the land-rich clarifications could prove problematic, depending on how they are actually applied by local tax authorities in practice. If Chinese enterprise asset values were to be generally determined on the basis of their accounting values, with solely immovable property stepped up to higher fair market value, more enterprises would fall into the "land rich" category. This could particularly be the case in light of the steadily increasing Chinese real estate prices of recent years.

Khoonming Ho (
Tel: +86 (10) 8508 7082
Lewis Lu (
Tel: +86 (21) 2212 3421

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