Notice 698: The Death of Offshore Holding Structures in China?
Supporting Your Business
The Chinese tax authorities very recently issued a new rule on the taxation of indirect transfers of Chinese companies, which may have a major impact on a number of offshore transactions signed after 1 January 2008.
Briefly, capital gains derived from the transfer of PRC resident enterprises by foreign entities are subject to a 10% tax. Notice 698 requires foreign entities to disclose indirect transfers of PRC resident enterprises to the PRC tax authorities when the offshore holding company through which such transfers are made is located in a low tax jurisdiction or such jurisdiction exempts income tax on foreign-sourced income. After reporting, the PRC tax authorities will then determine whether the offshore holding company is a shell company and potentially deem the indirect transfer as a direct transfer of the Chinese resident enterprise (such that the capital gain associated with the offshore transaction would be subject to PRC tax). Notice 698 is retroactively effective as of 1 January 2008.
Attached is a client alert
(with an unofficial translation of Notice 698) prepared by tax professionals of our China offices regarding the impact this Notice may bring. We encourage you to share it with any of your colleagues who might also find them of interest.
If you have any questions in relation to the content of the attached materials, please contact any of the our tax professionals listed in the attachment.
With kind regards,
Asia Pacific Tax Practice Group
Baker & McKenzie
Tel: +852 2846 1078
Fax: +852 2842 0530