China SAT Issues Announcement Clarifying Circular on Equity Transfer by Non-resident Enterprises

On March 28, 2011, the China State Administration of Taxation (SAT) issued the Announcement Regarding Several Issues on the Administration of Non-resident Enterprise Income Tax (EIT) (Announcement 24), which clarifies certain terms in the Circular on Strengthening the Administration of EIT on Gain Derived from Equity Transfer Made by Non-Resident Enterprises (Guo Shui Han [2009] No. 698) (Circular 698) issued by the SAT in December 2009. 

Among other things, Circular 698 provides that, where an offshore investor (actual controlling party) indirectly transfers equity in a Chinese resident enterprise, if the actual tax burden of the country (region) in which the offshore holding company transferred is located is lower than 12.5%, or the resident’s offshore income is not taxable, it shall, within 30 days from the date of signing the equity transfer contract, provide relevant information to the competent tax authorities at the location of the Chinese resident enterprise to which its equity is transferred.

The terms “offshore investor (actual controlling party)”, “actual tax burden” and “offshore income is not taxable” are defined in Announcement 24 as follows: 

• “Offshore investor (actual controlling party) refers to all the investors that indirectly transfer the equity interests in the Chinese resident enterprise, and not only those which have actual control over the Chinese resident enterprise; 
• “Actual tax burden” refers to the actual tax burden on the income from the transfer of equity interests;  
• “Offshore income is not taxable” means that EIT is not imposed on the income from the transfer of the equity interests.  

By clarifying these terms, the SAT strengthens the operability and enforceability of Circular 698 and ensures that all entities that fall under its purview will strictly comply with the information provision requirement. 

In addition to clarification of the above terms, the Announcement also clarifies the procedures for submitting information to the tax authorities according to Circular 698; i.e., where two or more offshore investors indirectly transfer equity in Chinese enterprises at the same time, only one of them needs to submit materials to the relevant tax authority.  Also, where an offshore investor transfers equity in two or more Chinese enterprises which are not located in the same province (city), they can choose to submit materials to the tax authority in charge of one of the enterprises.

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