Circular 698 used in Jiangsu Province to tax indirect equity transfer
Comments (0) On January 2010, a multinational investment group disposed of its shares (100%) in a Hong Kong holding company which held a 49% interest in a Chinese joint venture. The transaction was subsequently investigated by the Jiangdu National Tax Bureau in Jiangsu Province. As a result of this investigation, the Jiangdu National Tax Bureau concluded that the Hong Kong company was simply a special purpose vehicle without any employees, assets, liabilities, other investments or transactional business. On this basis the Jiangdu National Bureau indicated to the group that it would impose tax on the transfer on the basis of Circular 698, in particular that there was no reasonable business purpose for the interposed holding company. The group ultimately accepted this position and agreed to pay tax on the transfer amount.
As previously noted on this blog, Circular 698 provides that under certain conditions, overseas investors who indirectly transfer equity in a domestic resident company shall submit materials to the Chinese tax authorities as an obligation. Under the examining and verifying by SAT, indirect transfer can be re-determined according to economic substance, and the overseas intermediate company can be denied as an existence for tax arrangement. This shows the China tax authority’s determination in preventing overseas enterprise avoiding tax obligation in China by indirect equity transfer. The Circular provides the policy basis for taxing indirect equity transfers that was first established in the Chongqing case which was before the release of Circular 698.
Good time to start reviewing some of those ‘tried and true’ structures.
