State Administration of Taxation Notification on Strengthening Corporate Income Tax Management on Non-resident Enterprises Equity Transfer Income No. 698 (2009)

To State Administration of Taxation & local Taxation Bureau of each province, autonomous region, municipality and city specifically designated in the state plan:

In order to regulate and strengthen the corporate income tax management on equity transfer income, based on the “Enterprise Income Tax Law of The People’s Republic of China” and its implementing regulations, “Tax Collection and Administration Law of The People’s Republic of China” and its implementing regulations, “State Administration of Taxation Notification on issuing ‘Non-resident Corporate Income Tax Source Withholding Interim Measures’’ (No. 3 (2009)), and “Ministry of Finance State Administration of Taxation Notification on Issues Dealing With Corporate Income Tax on Enterprise Restructuring Business (No. 59 (2009)), there are a number of notices as follows:

1. The equity transfer income mentioned in this notification refers to equity transfer income of Chinese resident enterprise shares from a non-resident enterprise. (Buying and selling Chinese resident enterprise shares listed on a stock exchange are not included).
2. If a withholding agent is unable to perform withholding obligations or does not pay according to the Law, the non-resident enterprise shall declare and pay corporate income tax with the relevant tax administration authority where the Chinese resident enterprise registered at (the authority who is in charge of the corporate income tax collection and management of the Chinese resident enterprise) within 7 days after the agreed share transfer date according to the equity transfer contract or agreement (if the transferor obtains income from the transfer in advance, then the date should be the actual date when the equity transfer income occurs). Non-resident enterprise that does not declare truthfully or /and pay their tax on time will be dealt with according to the relevant tax collection and management laws and regulations.
3. Equity transfer income refers to the difference between the equity transfer price and the actual share cost. The equity transfer price refers to the income the share transferor received which may be in the form of cash, non-monetary assets or equity. If the invested enterprise has undistributed profit or holds various after-tax funds, the amount from stockholders retained earnings that is transferred together with the equity from the transferor will not be deducted from the equity transfer price. The actual share cost refers to the actual investment amount paid by the transferor to the Chinese resident enterprise at the time it invested in the shares, or the actual equity transfer price paid to the original transferor at the time buying those transferred shares.
4. When calculating the equity transfer income, the currency used when the non-resident enterprise invested in the Chinese resident enterprise or purchasing the equity from the original investor will be used to calculate the equity transfer price and the equity transfer cost price. If the same non-resident enterprise invested capital multiple times, the currency used in the first calculation will be used to calculate the equity transfer price and the equity cost price. The weighted average method will be used to calculate the equity cost price; if the currencies of each investment are not the same, the amount should be calculated in the currency used the first time with the exchange rate on the day that each investment occurred.
5. When a foreign investor (the actual controlling party) transfers a Chinese resident enterprise equity indirectly, if the actual tax rate is lower than 12.5% in the country (region) where the transferred offshore holding company is located or the country (region) does not levy income tax to its resident on overseas income, then the enterprise needs to provide the following information to the tax administration authority where the Chinese resident enterprise is registered within 30 days after the signing of the equity transfer contract:
   (a) The equity transfer contract or agreement;
   (b) The relationships between the foreign investor and the offshore holding company on funds, management, procurement and marketing;
   (c) The offshore holding company’s conditions on production, management, personnel, finance and property etc;
   (d) The relationships between the offshore holding company and Chinese resident enterprise on funds, management, procurement and marketing;
   (e) The proof of a reasonable business purpose on setting up the offshore holding company by the foreign investor;
   (f) Other relevant information required by the taxation authority.
6. If a non-resident enterprise transfers the equity in a Chinese resident enterprise to a related party and the transfer price is not in line with the arms length principle for the purpose of reducing taxable income, the relevant tax authority holds the right to make adjustment according to general practice.
7. If a foreign investor (the actual controlling party) transfers the equity in several onshore or offshore holding companies’ simultaneously, the Chinese resident enterprise whose equity is transferred should provide the whole transfer contract and supplementary contract to the relevant taxation authority. If there is no supplementary contract, the Chinese enterprise should provide detailed information on each transferred holding company to the relevant taxation authority, the transfer price for each native enterprise need to be clarified. If the price cannot be separated, the taxation authority holds the right to choose a reasonable approach to make adjustment to the transfer price.
8. If a non-resident enterprise who has obtained equity transfer income is eligible for special tax treatment according to the special organization restructuring requirement (Tax No. 59 (2009)), the enterprise should submit information in writing that provide proof of meeting the whole requirement for record-keeping purpose to the relevant taxation authority and get approval from provincial taxation authority.
9. Implementation of this notification starts on January 1, 2008. If you encounter any problem regarding implementation, please report to the State Administration of Taxation (International Taxation Division).

Issued on December 10, 2009