SAT Public Notice [2015] No.7 3 February 2015

Public Notice of the State Administration of Taxation Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non- Tax Resident Enterprises (the Public Notice) SAT Public Notice [2015] No.7 3 February 2015 In order to further regulate and enhance the administration of Corporate Income Tax (CIT) on indirect transfer of the equity interest in a China tax resident enterprise (TRE) and other properties in China by Non-TREs, the relevant matters are hereby notified as follows in accordance with the CIT Law of the People s Republic of China (PRC) (CIT Law) and its Detailed Implementation Regulations (DIRs), the Tax Collection and Administration Law of the PRC (TCAL) and its DIRs: 1 Where a Non-TRE indirectly transfers the equity interest in a China TRE and other properties in China through the implementation of a scheme without a reasonable commercial purpose and resulting in the avoidance of CIT liability, such indirect transfer should be re-characterised as a direct transfer of the equity interest in the TRE and other properties in China in accordance with Article 47 of the CIT Law. Equity interest in a TRE and other properties in China in the Public Notice shall refer to properties of an establishment or place (E&P) in China, immovable properties in China, equity investments in a Chinese TRE, etc. (hereinafter referred to as Taxable Properties in China ), which if the Non-TRE owned and transferred directly, the resulting gain would be subject to CIT in accordance with the provisions of the tax laws in China. The indirect transfer of Taxable Properties in China shall refer to the Non-TRE, through the transfer of the equity and other similar rights (hereinafter referred to as the equity ) of an overseas enterprise (not including overseas incorporated Chinese TREs, hereinafter referred to as the Overseas Enterprise ) which directly or indirectly owns Taxable Properties in China, generates the same or similar substantive outcome as compared with a direct transfer of Taxable Properties in China, including change in the shareholder of an Overseas Enterprise resulting from restructurings of the Non-TRE. The Non-TRE who indirectly transfers Taxable Properties in China is referred to as the Equity Transferor. 2 Where Article 1 of this Public Notice is applicable to the Equity Transferor, the portion of income which is attributable to Taxable Properties in China (hereinafter referred to as the income from indirect transfer of Taxable Properties in China ) derived by the Equity Transferor from the equity transfer of the Overseas Enterprise should follow the tax treatments in the order as below: (1) The portion which is attributable to properties of an E&P in China of the Overseas Enterprise and its subsidiaries which directly or indirectly hold the Taxable Properties in China (hereinafter referred to as the income from indirect transfer of E&P properties ) should be considered as income effectively connected with such an E&P and subject to CIT in accordance with Article 3.2 of the CIT Law. (2) In the circumstances other than that stipulated in Article 2 (1) of this Public Notice, the portion which is attributable to immovable properties in China (hereinafter referred to as the income from indirect transfer of immovable properties ) should be considered as income from the transfer of immovable properties sourced from China and subject to CIT in accordance with Article 3.3 of the CIT Law. (3) In the circumstances other than those stipulated in Article 2 (1) or Article 2 (2) of this Public Notice, the portion which is attributable to equity investments in Chinese TREs (hereinafter referred to as indirect equity transfer income ) should be considered as income from the transfer of equity investments sourced from China and subject to CIT in accordance with Article 3.3 of the CIT Law. 3 When assessing the reasonable commercial purpose, a holistic approach should be used to consider all the arrangements relevant to the indirect transfer of Taxable Properties in China based on the actual facts and circumstances. The following relevant factors shall be analysed comprehensively: 1

(1) Whether the main value of the equity of the Overseas Enterprise is derived directly or indirectly from Taxable Properties in China; (2) Whether a majority of the assets of the Overseas Enterprise is directly or indirectly comprised of investments in China, or whether a majority of its income is directly or indirectly derived from China; (3) Whether the actual functions performed and risks undertaken by the Overseas Enterprise and its subsidiaries which directly or indirectly hold the Taxable Properties in China can substantiate the economic substance of the corporate structure; (4) The existence duration of the shareholders, business model of the Overseas Enterprise and related organisational structure; (5) The situation regarding overseas income tax payment for the indirect transfer of Taxable Properties in China; (6) Whether the indirect investment or the indirect transfer of the Taxable Properties in China by the Equity Transferor can be substituted by a direct investment or a direct transfer of the Taxable Properties in China; (7) The information regarding whether Tax Treaties or Tax Arrangements can apply to the income from indirect transfer of Taxable Properties in China; (8) Other related factors. 4 Unless Article 5 or Article 6 of this Public Notice is applicable, where the overall arrangements related to the indirect transfer of Taxable Properties in China meets all of the following conditions, it shall be straight away considered as having no reasonable commercial purpose and there is no need to assess the factors provided in Article 3 of this Public Notice: (1) 75% or more of the value of the Overseas Enterprise is directly or indirectly derived from Taxable Properties in China; (2) At any time within one year before the indirect transfer of Taxable Properties in China, 90% or more of the total assets of the Overseas Enterprise (not including cash) is directly or indirectly comprised of investments in China, or 90% or more of Overseas Enterprise s income in the year before the indirect transfer of Taxable Properties in China is directly or indirectly derived from China; (3) The Overseas Enterprise and its subsidiaries which directly or indirectly hold the Taxable Properties in China are incorporated in that country (region) to satisfy the legal requirement of the organizational format, but actually only perform limited functions and undertake limited risks which are not enough to substantiate their economic substance; (4) The overseas income tax payable for the indirect transfer of Taxable Properties in China is less than the possible tax burden in China on the direct transfer of such Taxable Properties in China. 5 Article 1 of this Public Notice shall not apply where the overall arrangement related to the indirect transfer of Taxable Properties in China meets any one of the following conditions: (1) The Non-TRE deriving income from indirect transfer of Taxable Properties in China from the buying and selling of shares of the same listed Overseas Enterprise through public stock exchanges; (2) If the Non-TRE directly held and transferred the Taxable Properties in China, the income from the transfer of such property would otherwise be exempted from CIT according to the applicable Tax Treaty or Tax Arrangement. 2

6 Where the indirect transfer of Taxable Properties in China meets all of the following conditions, it shall be considered as having reasonable commercial purpose: (1) The shareholding relationship of the transaction parties shall satisfy any one of the following conditions: i ii iii The Equity Transferor directly or indirectly owns 80% or more of the equity interest in the equity transferee; The equity transferee directly or indirectly owns 80% or more of the equity interest in the Equity Transferor; 80% or more of the equity interest in the Equity Transferor and equity transferee are directly or indirectly held by the same party. Where more than 50% (not including 50%) of the value of the Overseas Enterprise is directly or indirectly derived from immovable properties situated in China, the shareholding relationship referred to in item i, ii, and iii of Article 6(1) shall be 100%. In the case of indirect shareholding as mentioned above, the equity interest shall be calculated by multiplying the shareholding percentage at each level. (2) The current indirect transfer would not result in the reduction in the CIT burden on the gain arising on the subsequent potential indirect transfer of Taxable Properties in China on comparing the subsequent potential indirect transfer of Taxable Properties in China after the current indirect transfer with the same or similar indirect transfer of Taxable Properties in China before the current indirect transfer. (3) The deal consideration of the transfer is totally paid in the form of the equity (not including the equity of listed enterprises) of the equity transferee or other enterprises having shareholding relationship. 7 Where the income from indirect transfer of E&P properties shall be subject to CIT in accordance with this Public Notice, the E&P shall include the income in its annual income in the taxable year when the tax obligation for the indirect transfer arises and file CIT according to the relevant regulations. 8 For income from indirect transfer of immovable properties or indirect transfer of equity interest which shall be subject to CIT in accordance with this Public Notice, the unit or individual that has the direct obligation to pay the relevant sum to the Equity Transferor in accordance with the relevant law or contract shall be the withholding agent. If the withholding agent does not withhold the tax or does not withhold enough amount, the Equity Transferor shall report the transaction to the in-charge tax authority and settle the tax payments within 7 days from when the tax obligation arises. The Equity Transferor shall also provide relevant documents in connection with the calculation of equity transfer gains and tax payable for the transfer. The in-charge tax authority shall report the case upwards level by level to SAT for record within 30 days upon the CIT settlement. If the withholding agent does not withhold tax and the Equity Transferor does not pay the CIT due, the in-charge tax authority can go after the withholding agent in relation to its withholding obligation in accordance with the TCAL and its DIRs; but if the withholding agent has submitted the documents required by Article 9 of this Public Notice within 30 days of signing the equity transfer contract or agreement, the legal obligation can be reduced or waived. 9 Both parties to the indirect transfer of Taxable Properties in China and the Chinese TRE being indirectly transferred may report the transaction to the in-charge tax authority and provide the following documents: (1) Equity transfer contract or agreement (a Chinese translation has to be prepared if the documents submitted are in foreign languages, the same below); 3

(2) Shareholding structure charts before and after the equity transfer; (3) Financial and accounting statements of the Overseas Enterprise and its subsidiary which directly or indirectly holds the Taxable Properties in China for the 2 years prior to the equity transfer; (4) Explanation of why first paragraph of Article 1 of this Public Notice does not apply to the indirect transfer of Taxable Properties in China. 10 Both parties to the indirect transfer of Taxable Properties in China, the planner as well as the Chinese TRE being indirectly transferred shall submit the following documents when requested by the in-charge tax authority: (1) The documents stipulated in Article 9 of this Public Notice (exclusive of the documents that have already been submitted); (2) Information relating to the decision or implementation process of the overall arrangement of the indirect transfer of Taxable Properties in China; (3) Information regarding the business operation, personnel, finance and properties of the Overseas Enterprise being transferred and its subsidiary which directly or indirectly holds the Taxable Properties in China, as well as the internal and external audit information; (4) The asset valuation report and other supporting evidence used to determine the price of the transfer; (5) The situation of overseas tax payments related to the indirect transfer of Taxable Properties in China; (6) Relevant evidence and information to support that Article 5 or 6 of this Public Notice should apply to the transaction; (7) Other related documents. 11 For cases where the in-charge tax authority has to launch an investigation of the indirect transfer of taxable properties in China and make adjustments, it shall follow relevant regulations on General Anti-Avoidance Rules (GAAR). 12 Where Equity Transferor directly transfers an Overseas Enterprise that results in the indirect transfer of the equity interests in two or more Taxable Properties in China and shall be subject to CIT as stipulated by this Public Notice, it shall report and file CIT with the respective in-charge tax authority of each Chinese TRE being indirectly transferred if it involves two or more in-charge tax authorities in China. The in-charge tax authority shall inform each other of the calculation method of the tax payable and collect CIT after reaching a consensus. Where a consensus cannot be reached, the in-charge tax authorities shall report to their mutual superior tax authority for coordination. 13 In the event that the Equity Transferor does not timely report and file the CIT due for the indirect transfer of Taxable Properties in China or does not fully settle its CIT liability, and the withholding agents does not withhold CIT, the in-charge tax authority, besides chasing for the CIT payable, shall impose an interest levy on a daily basis on the Equity Transferor in accordance with Article 121 and 122 of the CIT DIRs. If the Equity Transferor provides documents in accordance with Article 9 of this Public Notice, or reports and files CIT in accordance with Articles 7 and 8 of the Public Notice within 30 days of signing the contract or agreement for the equity transfer of the Overseas Enterprise, the interest levy shall be calculated based on the Base Rate stipulated in Article 122 of the CIT DIRs. If the Equity Transferor does not provide the required documents or file CIT in accordance with this Public Notice, the interest levy shall be calculated based on the Base Rate plus 5% points. 4

14 This Public Notice shall apply to income derived from indirect transfer of Taxable Properties in China by Non- TREs with no E&P in China, and where the Non-TRE has an E&P in China, the income derived from the indirect transfer of Taxable Properties in China is not effectively connected with such E&P. Where the income derived from equity transfer of an Overseas Enterprise by the Equity Transferor (including the indirect transfer of Taxable Properties in China) is effectively connected with the E&P in China, this Public Notice shall not apply and the relevant gains shall be subject to tax in accordance with Article 3.2 of the CIT Law directly. 15 The date when the CIT obligation arises as stipulated in this Public Notice shall refer to the date when the relevant equity transfer contract or agreement takes effect and the relevant procedures for the change in equity ownership of the Overseas Enterprise are completed. 16 The term In-charge tax authority stated in this Public Notice shall refer to the tax authority in charge of the CIT payable for the income derived from the transfer of relevant taxable properties should the Taxable Properties in China be directly owned and transferred by the Non-TRE, and shall be determined respectively in accordance with the three scenarios stipulated in Article 2 of this Public Notice. 17 The term more than stated in this Public Notice shall contain the figure itself, except otherwise specified. 18 Where the provisions in this Public Notice conflict with the provisions in Tax Treaties, the provisions in Tax Treaties shall prevail. 19 The Public Notice shall take effect from its issuance date. Unsettled tax matters before the effective date shall follow this Public Notice. Article 5 and Article 6 of the Notice Issued by the SAT Regarding Reinforcing the Administration of CIT Collection and Income Derived from Equity Transfers by Non-TREs (Guoshuihan [2009] No.698) and Article 6.3, 6.4, 6.5 of the Notice Issued by the SAT Regarding Administration of Certain CIT Issues for Non-TREs (the SAT Public Notice [2011] No.24) are repealed at the same time. ------End------ The information contained in this document is for general guidance on matters of interest only and is not meant to be comprehensive. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual PricewaterhouseCoopers client service team or your other tax advisers. The contents contained in this document were translated on 6 February 2015 and were based on the information available at that time. We welcome you to visit our website www.pwccn.com and www.pwchk.com for practical insights and professional solutions to current and emerging business issues. 2015 PricewaterhouseCoopers Limited. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers Limited, or, as the context requires, the PricewaterhouseCoopers global network or other member firms in the network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. 5