Announcement on Several Issues Concerning the Enterprise Income Tax on the Indirect Transfer of Assets by Non-resident Enterprises

关于非居民企业间接转让财产企业所得税若干问题的公告 (中文)

STA Announcement [2015] No.7 — Issued by the State Taxation Administration on February 3, 2015. Effective from the date of publication.

Sources:

• Chinese text: 广东省税务局 (Guangdong Provincial Tax Service)

All information in this document is authentic in Chinese. English is provided for reference only. In case of any discrepancy, the Chinese version shall prevail.

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Point 1 — Re-characterization of Indirect Transfers

Where a non-resident enterprise, through an arrangement lacking reasonable business purpose, indirectly transfers equity in a Chinese resident enterprise or other property, thereby avoiding EIT obligations, the transaction shall be re-characterized as a direct transfer per Article 47 of the EIT Law.

"Equity in Chinese resident enterprises and other property" refers to property directly held by the non-resident enterprise where transfer income should be subject to EIT in China, including property of establishments or places in China, immovable property in China, and equity investment assets in Chinese resident enterprises (collectively "Chinese Taxable Assets").

An indirect transfer means a transaction where a non-resident enterprise transfers equity in an offshore enterprise that directly or indirectly holds Chinese Taxable Assets, producing the same or similar outcome as a direct transfer. The non-resident enterprise is the "Equity Transferor".

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Point 2 — Tax Treatment Sequence

Where income is attributable to Chinese Taxable Assets, tax treatment follows this order:

1. Income attributable to establishment/place property — treated as effectively connected income, taxed per Article 3(2) of the EIT Law;
2. Income attributable to immovable property in China — treated as immovable property transfer income sourced from China, taxed per Article 3(3);
3. Income attributable to equity investment assets in Chinese resident enterprises — treated as equity transfer income sourced from China, taxed per Article 3(3).

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Point 3 — Factors for Determining Reasonable Business Purpose

All arrangements related to the indirect transfer shall be considered holistically, analyzing:

1. Whether the offshore enterprise's equity value is primarily derived from Chinese Taxable Assets;
2. Whether its assets are primarily composed of investments in China, or income primarily sourced from China;
3. Whether the offshore enterprise's functions and risks demonstrate economic substance;
4. Duration of existence of the offshore enterprise's shareholders, business model, and organizational structure;
5. Foreign income tax payable on the indirect transfer in the overseas jurisdiction;
6. Substitutability of indirect vs. direct investment/transfer;
7. Applicability of any tax treaty to the income;
8. Other relevant factors.

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Point 4 — Automatic Deemed Lack of Reasonable Business Purpose

Except as provided in Points 5 and 6, where the arrangement simultaneously meets all of the following, it is directly deemed to lack reasonable business purpose:

1. More than 75% of the offshore enterprise's equity value derives from Chinese Taxable Assets;
2. Within one year before the transfer, more than 90% of total assets (excluding cash) were China investments, or more than 90% of income was sourced from China;
3. The offshore enterprise's actual functions and risks are limited and insufficient to demonstrate economic substance;
4. Foreign income tax on the indirect transfer is lower than the potential Chinese tax on a direct transfer.

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Point 5 — Safe Harbors

Point 1 shall not apply where:

1. The non-resident enterprise acquires and sells equity in the same listed offshore enterprise on a public market;
2. If the non-resident enterprise were to directly transfer the Chinese Taxable Assets, the income would be exempt from EIT under an applicable tax treaty.

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Point 6 — Deemed Reasonable Business Purpose (Intra-group Restructuring)

An indirect transfer is deemed to have reasonable business purpose if all conditions are met:

(1) The equity relationship meets any one of:

• The Equity Transferor holds 80%+ equity in the Transferee (directly or indirectly);
• The Transferee holds 80%+ equity in the Transferor;
• Both are held 80%+ by the same party.

Where more than 50% of the offshore enterprise's equity value derives from immovable property in China, the thresholds above become 100%.

Indirect ownership is calculated by multiplying percentage holdings through the chain.

(2) The Chinese tax burden on any subsequent indirect transfer would not be reduced compared to without the current transaction.

(3) The Transferee pays consideration entirely in its own equity or equity of controlled entities (excluding listed enterprise equity).

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Point 7 — Tax Reporting for Establishment/Place Property Income

Where establishment/place property income is subject to EIT, it shall be included in the establishment's income for the tax year in which the obligation arises.

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Point 8 — Withholding Obligations for Immovable Property and Equity Income

Where immovable property or equity transfer income is subject to EIT, the entity or individual with a direct payment obligation to the Equity Transferor shall be the withholding agent.

Where the withholding agent fails to withhold, the Equity Transferor shall declare and pay tax within 7 days from the tax obligation date, and provide relevant materials. The tax authority shall report to the STA within 30 days after tax is collected.

Where the withholding agent fails to withhold and the Equity Transferor has not paid, the tax authority may pursue the withholding agent's liability; however, if materials per Point 9 were submitted within 30 days from signing the transfer contract, liability may be mitigated or waived.

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Point 9 — Voluntary Reporting

Both parties and the Chinese resident enterprise whose equity is indirectly transferred may voluntarily report to the tax authority and submit:

1. The equity transfer contract or agreement (with Chinese translation if in foreign language);
2. Organizational chart of equity structure before and after the transfer;
3. Financial statements of the offshore enterprise and subsidiaries for the previous two years;
4. Reasons why the transfer does not fall within Point 1.

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Point 10 — Mandatory Disclosure upon Request

Upon the tax authority's request, the parties, transaction planners, and the Chinese resident enterprise shall provide:

1. Materials per Point 9 (if not already submitted);
2. Decision-making/execution process information;
3. Information on the offshore enterprise's operations, personnel, accounting, and property, and audit status;
4. Asset valuation reports and pricing basis;
5. Foreign income tax situation;
6. Evidence relevant to Points 5 and 6;
7. Other relevant materials.

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Point 11 — Investigation and Adjustment

Where the tax authority needs to investigate and adjust, it shall proceed per General Anti-Avoidance (GAAR) rules.

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Point 12 — Multiple Taxable Assets under Different Tax Authorities

Where indirect transfer results in two or more Chinese Taxable Assets involving different tax authorities, the Equity Transferor shall separately declare and pay EIT to each authority.

The tax authorities shall notify each other of calculation methods and reach consensus. If consensus cannot be reached, the matter shall be reported to the common superior authority.

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Point 13

Where the Equity Transferor fails to declare and pay tax on time, and the withholding agent also fails to withhold, in addition to recovering tax payable, interest shall be charged daily per Articles 121–122 of the Implementation Regulations.

Where materials per Point 9 are provided or tax is declared within 30 days from signing the transfer contract, interest is calculated at the benchmark rate. Otherwise, interest is calculated at the benchmark rate plus 5 percentage points.

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Point 14 — Scope of Application

This Announcement applies to income from indirect transfer of Chinese Taxable Assets derived by non-resident enterprises that have no establishment or place in China, or whose income is not effectively connected with an existing establishment.

Where the Equity Transferor's income is effectively connected with its establishment, this Announcement need not apply — tax is levied directly per Article 3(2) of the EIT Law.

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Point 15 — Date of Tax Obligation

The tax obligation arises on the date the transfer contract becomes effective and the offshore enterprise completes the equity change registration.

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Point 16 — Competent Tax Authority

The competent tax authority is determined per the three categories in Point 2, as if the Chinese Taxable Assets were directly held and transferred by the non-resident enterprise.

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Point 17 — Interpretation of "Above" / "Or More"

The terms "above" (以上) and "or more" include the stated number itself, unless otherwise indicated.

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Point 18 — Tax Treaty Override

Where this Announcement is inconsistent with an applicable tax treaty, the tax treaty shall prevail.

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Point 19 — Effective Date and Transitional Provisions

This Announcement takes effect from the date of publication (February 3, 2015). Matters that occurred before publication but have not been processed shall be handled per this Announcement.

The following are simultaneously repealed:

• Articles 5 and 6 of Guoshuihan [2009] No.698;
• Article 6, items (3), (4), and (5) of STA Announcement [2011] No.24.

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State Taxation Administration

February 3, 2015