Recent China Tax Developments Affecting Private Equity Investment

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There has been talk in the market that draft tax rules may unify the tax treatment of partnerships nationwide and seek to impose tax on unrealized gains of partners in Chinese partnerships. The State Administration of Taxation has publicly stated in early May that the rules on partnership taxation will not provide for the taxation of unrealized gains.

In a recently reported Circular 698 case involving the sale of a Hong Kong company owning 56 percent of a Chinese company, the Chinese tax authorities asked the Hong Kong purchaser to withhold the BVI seller's Chinese capital gains tax liability from its purchase price payment.