This post is inspired by an article I am preparing on  Circular 601 and the use of SPVs in China. In the article I state the following (the article is far from finished and the particular sentence may or may not make the final cut):

Often the tax benefits of interposing an SPV were overstated as it was advocated by non-tax lawyers who did not truly understand that the tax laws of the ultimate owner’s home jurisdiction may still subject any income held by the SPV to tax, such as via controlled foreign company and similar anti-deferral provisions.

This comment is essentially inspired by my experiences in working under a non-tax corporate lawyer at another firm (I will preface this by saying he was a bad lawyer generally and so is probably atypical of such lawyers). Invariably he would strongly recommend to both US and Australian clients (and in fact any clients but I point out these two jurisdiction as they have far reaching CFC provisions – see below) that they should establish an SPV in Hong Kong for “tax reasons” and in particular because Hong Kong did not tax income earned off-shore.  Firstly, he is generally  correct about the Hong Kong aspect. However, what such advice neglects is that many countries have Controlled Foreign Companies (CFC) provisions that will deem (where the provisions are applicable, as they nearly always were in the circumstances) the income to be accrued by the ultimate controller in the home jurisdiction effectively negating any tax or deferral benefit.

I recount this story because too often in China, in my experience, corporate lawyers of the non-tax kind either ignore tax considerations or provide extremely poor advice on the tax implications of a particular transaction (for example, concentrating on only 1 tax issue in the transaction). This is probably because of the traditional disjuncture in China between law and tax – whereas most jurisdictions have a long tradition of tax lawyers, in China tax has been largely an accountants game until very recently.

The result of the advice given by the lawyer I referred to above is that many clients were left with a structure that provided them with little tax benefit but had added cost. This doesnt mean that there are no non-tax benefits from using such a structure – SPVs can provide an excellent exit strategy for a business.  There are also some circumstances where a tax benefit will occur, but not in all circumstances. The point is that law, and particularly tax, is an extremely sophisticated and fluid game. What may be appropriate in one set of circumstances will not be appropriate in another. It is also dangerous to rely on structures that were suitable 5 years ago (or even 2) without considering if they are still suitable today. I wonder how many corporate lawyers in China are truly aware of the SAT’s recent position to using SPVs to avoid tax.