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 Companies Mar 31, 2011 Beijing 北北 Shanghai 北北 Tianjin 北北 Guangzhou 北北 Chengdu 北北 Hongkong 北北 Taipei 北北 Singapore 北北北 NewDelji 北北北 Copenhagen 北北北北 Zurich 北北北
Transcript
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
- 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.
New tax rule had been released in 12/2009 & took effective
retroactively from Jan 2008
- provide general guidance on the reporting requirements on
share transfer (direct transfer / indirect transfer)
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%
Situation 1 Direct transfer Beijing Shanghai Tianjin Guangzhou
Chengdu Hongkong Taipei Singapore NewDelji Copenhagen Zurich
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).
Following documents (altogether with the share transfer
agreement ), required by the PRC tax authority, shall be submitted
to complete the tax registration.
Relationship between the Ultimate Holding Co and the offshore
Holding Co
(in relation to funding, personnel and sales and purchase,
etc)
Relationship between the offshore Holding Co and the China
company (ditto)
Business operation, personnel, accounts, properties, etc. of
the Offshore Holding Co
Statement regarding to bona fide commercial purposes of the
incorporation of the offshore Holding Co -------intention
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).
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.
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.
Ultimate Holding Company A China JV Company - C (located in
Jiangdu) HK Holding Company Offshore Onshore Sale PRC Investor US
Buyer - B 49% 51% Beijing Shanghai Tianjin Guangzhou Chengdu
Hongkong Taipei Singapore NewDelji Copenhagen Zurich
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.