Notice of the State Administration of Taxation on Strengthening the Management of Enterprise Income Tax Collection of Proceeds from Equity Transfers by Non-resident Enterprises

Guoshuihan [2009] No. 698

The administrations of state taxes and administrations of local taxes of all provinces, autonomous regions, municipalities directly under the Central Government, and cities under separate State planning:

To standardize and strengthen the enterprise income tax collection and management of proceeds from equity transfers by non-resident enterprises, in accordance with the Enterprise Income Tax Law of the People’s Republic of China and its Implementing Rules, the Tax Collection and Management Law of the People’s Republic of China and its Implementing Rules, the Notice of the State Administration of Taxation on Printing and Distribution of Provisional Administrative Measures on Enterprise Income Tax Withholding at Source for Non-resident Enterprises (Guoshuifa [2009] No. 3), as well as Circular of the Ministry of Finance and the State Administration of Taxation on Several Issues on Corporate Income Tax Treatment of Corporate Restructuring Transactions (Caishui [2009] No. 59) relevant issues are hereby clarified as follows:

1. Proceeds from an equity transfer as referred to in this circular represents proceeds from the alienation of the equity interests in Chinese resident enterprises (excluding the purchase and sale of the stock of Chinese resident enterprises on public securities markets) by non-resident enterprises;

2. Where the withholding agent fails or is unable to fulfill its withholding obligations, non-resident enterprises shall file and pay the enterprise income tax to the competent tax authority supervising the Chinese resident enterprises whose equity interests are transferred (i.e., the tax authority in charge of collecting enterprise income tax of such resident enterprise) within seven days after the equity transfer date as agreed in the contracts or agreements (or after the date when the proceeds are actually obtained, if the transferors receive the proceeds of equity transfers in advance). If non-resident enterprises fail to file timely and accurately, the relevant provisions in the Tax Collection and Management Law of the People’s Republic of China shall apply.

3. Proceeds from equity transfer refers to the difference between the consideration of the equity transfer minus the cost of the equity interest;

Consideration of the equity transfer represents the total amount received by the transferor in the form of cash, non-monetary assets or interests with respect to the equity transfer; if the investee enterprises have retained earnings or after-tax reserves and such retained earnings and after-tax reserves are transferred to the transferee along with the equity interests being alienated, such amount of retained earnings and after-tax reserves shall not be deducted from the consideration of the equity transfer;

Cost of the equity interest represents the capital contribution actually paid to the Chinese resident enterprises when the transferor made such investment, or the consideration actually paid to the prior transferor when the equity interests were purchased;

4. In calculating the proceeds from equity transfers, the currency used by non-resident enterprises to make investments into Chinese resident enterprises whose equity interests are transferred, or the currency used to purchase such equity interests from the former investors shall be used to calculate the consideration of the equity transfer and cost of the equity interest. If a non-resident enterprise made investments for more than one time, the currency it used for the first investment shall be used to calculate the consideration of the equity transfer and cost of the equity interest, and a weighted average method shall be adopted to calculate the cost of the equity interest. Where different currencies were used in making the investments, the then-prevailing exchange rate on the date when the capital was injected shall be used to convert the currency into the one used for the first investment;

5. When the offshore investor (actual controlling party) indirectly transfers the equity interests in a Chinese resident enterprise, if the actual tax burden in the jurisdiction of the offshore holding company being transferred is less than 12.5%, or if such jurisdiction exempts income tax on foreign-sourced income for its tax residents, the following documents should be provided to the tax authority supervising the Chinese resident enterprise whose equity interests are transferred, within 30 days after signing the equity transfer agreement:

(1) Equity transfer agreement/contract;

(2) The relationship between the offshore investor and the offshore holding company being transferred in terms of capital, operation, sales and purchase etc.;

(3) Introduction of operation, employees, bookkeeping, and assets of the offshore holding company being transferred by the offshore investor;

(4) The relationship between the offshore holding company being transferred by the offshore investor and the Chinese resident enterprise, in terms of capital, operation, sales and purchases;

(5) Explanation of the reasonable business purpose with respect to the offshore holding enterprise being transferred by the offshore investor; and

(6) Other materials requested by the tax authority.

6. If the offshore investor (actual controlling party) indirectly transfers the equity interests in a Chinese resident enterprise via abuse of organization forms and certain enterprise income tax obligations are avoided without a reasonable business purpose, after being reported to higher authorities and reviewed by the State Administration of Taxation, the supervising tax authority can decide the nature of the transaction of such equity transfer according to its business substance and deny the existence of the offshore holding company which is used for tax planning purposes.

7. The tax authority can adjust the taxable income using reasonable methods, provided that the income is reduced as a result of an equity transfer of Chinese resident enterprise by a non-resident enterprise to its related parties not applying the arm’s length principle.

8. If the offshore investor (actual controlling party) transfers its equity interests in several onshore and offshore holding companies simultaneously, the Chinese resident enterprises being transferred should provide the supervising tax authority with the agreements regarding the whole transaction and the agreement with respect to itself. If there is no separate agreement for the Chinese resident enterprise, it should provide to the supervising tax authority detailed information with respect to each of the holding companies being transferred, for the purpose of allocation of transfer amounts with respect to the domestic entity. The tax authority has the discretion to adjust the transfer amount if it cannot be allocated precisely.

9. If the capital gain derived from an equity transfer by a non-resident enterprise is qualified for special tax treatment provided by Caishui [2009] No. 59 and such non-resident enterprise chooses the special restructuring method, written documentations should be submitted to the supervising tax authority to prove such qualification, subject to approval from the provincial tax authority.

10. This Notice is effective from January 1, 2008. Issues in implementation of the Notice should be reported to the International Taxation Department of the State Administration of Taxation in a timely manner.

December 10, 2009