How do China’s anti-avoidance foundations affect taxes?

China’s general anti-avoidance rules (GAAR) were first introduced under the 2008 Corporate Income Tax (CIT) Law which provides that, where an enterprise’s taxable income is reduced due to its implementation of “arrangements that do not have a reasonable business objective,” the tax authority will have the right to make adjustments.

The CIT implementing rules further clarify that such arrangements are those for which the main purpose is to reduce, avoid or defer the payment of taxes.

Where there is abuse of tax preferential policies, tax treaties, enterprise organizational form, tax havens, or other arrangements without reasonable business purpose, tax authorities can launch a general anti-tax avoidance investigation based on the principle of “substance over form.”