The Chinese government has released guidance on the application of its general antiabuse rule (GAAR) to indirect transfers of Chinese assets, the State Administration of Taxation (SAT) announced February 6.
The guidance,”The Public Notice Regarding Certain CIT Matters on Indirect Transfer of Properties by Non-TREs,” addresses taxpayers that “package” a direct transfer of assets in China as an indirect transfer to avoid Chinese corporate income tax, the SAT said in an English-language release.
“China has maintained an ongoing economic boom which has resulted in the accumulation of a considerable amount of wealth in the value of immovable properties, equity investments, and other properties. These huge amounts of capital appreciation constitute a very important source of cross-border tax revenue for China,” the SAT explained.
The guidance lists factors to be used to assess whether an arrangement involving an indirect transfer lacks a reasonable commercial purpose and is subject to GAAR. It also contains a safe harbor rule, and outlines reporting and tax filing obligations, the SAT said.
In drafting the guidance, the SAT said it considered feedback from a stakeholders on its earlier guidance, Circular 698, released in 2009. The SAT said it sought create rules that enhanced certainty of tax policies and compliance.
Factors used to determine if an arrangement has a reasonable commercial purpose include the value and composition of assets held by transferred entity; whether the transaction can be substituted for a direct transaction; and the functions, risks, and economic substance of the transaction, the SAT said.
Safe-harbor rules are introduced in the guidance to reduce tax compliance burdens and provide certainty to commercial activities which are not carried out for tax avoidance purposes.
Also, reporting obligations of taxpayers and withholding agents are no longer mandatory, reducing compliance burdens, the SAT said.
The Chinese government finalized administrative measures implementing GAAR on December 12.
“The Public Notice Regarding Certain CIT Matters on Indirect Transfer of Properties by Non-TREs” (in Chinese) can be accessed on the State Administration of Taxation website at the following location: http:/www.chinatax.gov.cn/n810341/n810755/c1491377/content.html.
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