circular 698 tax on capital gain from share transfers by non-resident companies
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Tax on capital gain from share transfers by non-resident companiesTRANSCRIPT
- 1. Tax on Capital Gain from Share Transfers by Non-Resident Companies Mar 31, 2011 Beijing Shanghai Tianjin Guangzhou Chengdu Hongkong Taipei Singapore NewDelji Copenhagen Zurich
- 2. Agenda
- Part 2 - Case Study ( Jiangdu Case & Others)
- Part 3 - Impact on Non-resident investors
- Part 4 Calculation of IIT
- Part 1 - Tax Circular 698
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- Situation 1
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- Situation 2
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- 3. Tax Circular 698
- Guoshuihan [2009] No.698 (Circular 698)
- - Capital gain tax will be imposed by the tax authority if the gain is derived from source of China. In the past, there was no capital gain tax on transfer of share in overseas.
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- New tax rule had been released in 12/2009 & took effective retroactively from Jan 2008
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- - provide general guidance on the reporting requirements on share transfer (direct transfer / indirect transfer)
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- Not applicable to listed Chinese company
- 4. Tax Circular 698
- There are 2 situations in relation to offshore share transfer:
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- Situation 1: Direct transfer
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- Offshore holding company hold and transfer the share of china company directly
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- Situation 2: Indirect transfer
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- More parties may involve, ultimate share holding company transfer the share of china company via another company
- 5. Situation 1 Situation 1 Direct transfer Sale Offshore
Onshore Holding Company Company A China Company Non-resident
Company B
- The seller (Non-resident Company A) should
- Perform the tax filing with PRC tax authority in-charge either by itself or through a tax agent.
- Submit a copy of share transfer agreement
- Within 7 days after the share transfer agreement is concluded
- 6.
- PRC Tax Implications -
- Capital gain earned by Non-resident Company A is a passive income, which is sourced from China .
- Capital gain = Income from share transfer (paid in cash, non-monetary assets or equity) cost of the shares
- Therefore, capital gain = accumulated profit (after tax)
- Be subject to WHT at 10%
- 7. Situation 2 Indirect transfer Situation 2 Ultimate Holding
Company X China Company Offshore Holding Co. Z Offshore Onshore
Sale Non-resident Company Y
- The seller (Non-resident Company X) -
- Whether the tax rate in the country of offshore company lower than 12.5% or capital gain tax exempted ?
- Answer is Yes -> should submit a copy of share transfer agreement to tax authority (who is in charge of the China company).
- Within 30 days after the agreement is concluded.
- 8. Situation 2 Indirect transfer
- Following documents (altogether with the share transfer agreement ), required by the PRC tax authority, shall be submitted to complete the tax registration.
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- Relationship between the Ultimate Holding Co and the offshore Holding Co
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- (in relation to funding, personnel and sales and purchase, etc)
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- Relationship between the offshore Holding Co and the China company (ditto)
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- Business operation, personnel, accounts, properties, etc. of the Offshore Holding Co
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- Statement regarding to bona fide commercial purposes of the incorporation of the offshore Holding Co -------intention
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- Other documents required/relevant
- 9. Situation 2 Indirect transfer
- Whether the business structure has bona fide Commercial purpose ?
- If PRC tax authority considers the business structure has NO commercial purpose , the offshore holding Co. may be regarded as a shell company , and its existence be denied from tax perspective.
- Indirect Transfer (Situation 2) - > Direct Transfer (Situation 1).
- The offshore Seller (Company A) transfers the shares of a China company to the offshore Buyer (Company B).
- The offshore Seller (company A) would be taxed.
- 10. Situation 2 Indirect transfer
- According to General Anti-tax avoidance rule (GAAR)
- (CIT Law, Article 47)
- Tax authority has the right to make adjustments with reasonable methods, where a company makes business without bona fide commercial purposes which result in reducing or deferring its revenue or taxable income.
- 11. Case study Jiangdu case
- A real-life case
- In June 2007, an offshore Investor (a famous US investment fund) acquired the shares of a China JV company, through its HK subsidiary. And, in early 2009, the offshore Investor plans to dispose the shares.
- Jiangdu State Tax Bureau monitored the transaction, and reported to PRC State Administration of Taxation (SAT).
- Tax authority finally concluded that the HK holding Co has no business substance and its existence shall be denied.
- The reason is - The HK holding Co. did not have any employees, assets/liabilities, investments, but the shares in the China company.
- 12. Case study Jiangdu case Beijing Shanghai Tianjin Guangzhou Chengdu Hongkong Taipei Singapore NewDelji Copenhagen Zurich Timeline Progress (step by step) In early 2009 Jiangdu tax authority learnt from a JV i.e. Company C during a common tax administration review, that its foreign investor Company A may want to dispose its shares in the JV through an indirect offshore share transfer. As there is no tax regulations on the indirect share transfer, Jiangdu tax authority reports this case to the State Administration of Taxation (SAT). 10th Dec. 2009 SAT released Circular 698 to clarify the taxation on indirect offshore share transfer. 14th Jan, 2010 Company A transferred its shares of Company B to a US buyer, and obtained the huge amount of capital gain. 18th May, 2010 After several rounds of meeting and negotiation, Company A agrees to pay tax of RMB173 million (equivalent to USD25.4 million ).
- 13. Case study others Currency: RMB Beijing Shanghai Tianjin Guangzhou Chengdu Hongkong Taipei Singapore NewDelji Copenhagen Zurich City in China Transaction Time Capital gain Withholding income tax (WHT) Da Lian Mar 2009 860.0 million 60.50 million He Nan July 2009 115.5 million 10.09 million Xiao Shan Aug 2009 31.2 million 3.12 million Liao Ning Dec 2009 11.2 million 1.12 million Zhe Jiang Apr 2010 101.7 million 10.17 million
- 14. Impact on Non-resident investors
- Tax compliance burden
- - Foreign investors in BVI, HK etc (effective tax rate < 12.5%) may be obligated to report to PRC tax authority.
- GAAR (general anti-tax avoidance rules)
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- Trends of offshore share transfer
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- Holding Co. is with commercial purpose and substance of business.
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- No capital gain
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- Foreign investor be individual
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- Enjoy the preferential tax treaty benefits
- 16. Contact Us
- NCO China
- Tel.: Beijing: (8610) 8447 8118
- Tel.: Shanghai: (8621) 5169 9589
- E-mail: [email_address]
- Website: www.ncochina.com