China Tax Monthly is a monthly publication produced by our China Tax Group. In this issue, we discuss the following tax developments in China: 

1. TASE Tax Incentives Extended to 10 More Cities

On 12 October 2016, China issued Notice 1081 to extend the enterprise income tax (EIT) incentives for technology-advanced service enterprises (TASEs) to 10 more cities, including Shenyang, Changchun, Nantong, Zhenjiang, Fuzhou, Nanning, Urumchi, Qingdao, Ningbo and Zhengzhou. According to Notice 108, qualified TASEs in these 10 cities may enjoy a reduced EIT rate of 15 percent and a higher deduction cap (i.e., 8 percent of the salary expense) for employee educational expenses2 from 1 January 2016 to 31 December 2018.

We expect the TASE recognition procedure in these 10 cities will start soon. Every enterprise intending to seek TASE tax benefits should self-assess its eligibility and prepare a TASE application.

2. China Issues Draft CRS Legislation

On 14 October 2016, the State Administration of Taxation (SAT) published the draft Administrative Measures on Due Diligence of Taxrelated Information of Non-resident Financial Accounts3 to introduce the OECD’s proposal of common reporting standards (CRS) into China.

The draft is expected to be finalized and take effect on 1 January 2017. The draft provides key provisions on financial institution reporting, reportable financial accounts, due diligence procedures, and information requirements.

Reporting FIs

The draft applies to financial institutions that are established in China, including depository, custodial, investment and certain insurance institutions.

Reportable financial accounts

Under the draft, financial institutions in China are required to report information on non-resident financial accounts to the SAT. A non-resident financial account refers to a financial account held at a financial institution in China by a non-resident, or by a passive non-financial institution that is controlled by one or more non-residents.

A non-resident is any person (individual, entity or organization) that is not a PRC resident. Governmental institutions, international organizations, central banks, financial institutions, and listed companies and their related parties are expressly excluded. A person who is both a tax resident in China and in another jurisdiction is regarded as a non-resident.

Certain financial accounts are expressly excluded from the scope of the draft, including certain pension, deposit, investment, life insurance and dormant accounts, as well as social insurance accounts and government held accounts.

Due diligence procedures

The draft provides different due diligence procedures for pre-existing and newly opened financial accounts.

For pre-existing individual accounts, financial institutions should complete due diligence by the end of 2017 on accounts with balances over RMB6 million as of 31 December 2016, and by the end of 2018 on all other accounts.

For pre-existing accounts held by passive non-financial institutions, financial institutions should complete due diligence by the end of 2018 on accounts with balances over RMB1.5 million as of 31 December 2016. Due diligence is not required for the other accounts unless the account balance exceeds RMB1.5 million after 31 December 2016. Due diligence on these accounts would need to be completed by the end of the following year.

For newly opened financial accounts (individual accounts or entity accounts), due diligence is required for each account. As part of the due diligence, the financial institution must request from the new account holder a self-certification statement of the account holder’s tax residence(s).

Information required

The financial institution must report:

  • account holder information, including name, address, jurisdictions of residence, tax identification numbers, and date and place of birth (for individual account holders);
  • information on the non-resident controller of a passive nonfinancial institution, such information includes name, address, jurisdictions of residence, tax identification numbers, and date and
    place of birth;
  • account number (or functional equivalent);
  • the name, address and tax identification number of the reporting financial institution;
  • the account balance or value (including the cash value or surrender value of a cash value insurance contract or annuity contract) or the account closure information without balance information if the account was closed during the reporting year;
  • financial information, which means:
    • for depository accounts, the total gross amount of interest paid or credited to the account;
    • for custodial accounts:
      • the total gross amount of interest or dividends paid or credited to the account, and the total gross amount of other income paid or credited to the account generated with respect to the assets held in the account; or
      • the total gross proceeds paid or credited to the account from the sale or redemption of financial assets if the reporting financial institution is the agent, intermediary or nominee holder;
    • for other accounts, the total gross amount of proceeds paid or credited to the account; and
  • other information required by the SAT.


China’s draft CRS legislation signals China’s continuous effort to push the automatic exchange of CRS information. Automatic exchange of CRS information will soon become a reality in China. As non-PRC residents usually do not hold accounts in PRC financial institutions due to foreign currency control policies, China’s automatic exchange network for CRS information is unlikely to have an immediate impact on non-PRC residents. However, this automatic exchange network could immediately impact PRC residents who hold offshore assets. The PRC tax authorities will likely strengthen tax collection on the PRC residents’ offshore income.

3. Beijing Case: Tax Bureau Allocated the Value of Foreign-owned Trademark to Chinese Entity

On 30 September 2016, China Taxation News reported that the Daxing District State Tax Bureau in Beijing allocated the value of a foreign-owned trademark to the underlying Chinese company in an indirect transfer and collected RMB89.04 million in EIT and interest from the non-resident transferor.4


The indirect transfer was realized through a transfer of an offshore company, which indirectly owned a Chinese company called Xiabu Xiabu Catering Management Co., Ltd (Chinese Target).

In January 2013, the non-resident transferor reported the transaction to the tax bureau and declared an EIT liability of RMB69 million. However, in the subsequent tax assessment, the tax bureau and the transferor disagreed on the portion of the transfer price that should be allocated to the Chinese Target. The key issue in dispute was whether the value of the “XIABU XIABU” trademark should be allocated to the Chinese Target.

The transferor allocated the value of the trademark to an offshore entity because the trademark was registered offshore. Whereas, the tax bureau decided the value of the trademark should be allocated to the Chinese Target because the value of the trademark was created in mainland China.

After more than three years’ negotiation, the transferor finally agreed to allocate the value of the trademark to the Chinese Target and paid RMB89.04 million in EIT and interest, which was RMB20 million more than the tax originally declared by the transferor.


The tax bureau’s decision in the Beijing Case is consistent with the Chinese tax authorities’ long-held position that the economic value of an intangible should be allocated to the party that contributes to the intangible’s value creation rather than the legal owner. In light of the Beijing Case, each multinational company should fully consider the tax implications of legal vs. economic ownership of intangibles when structuring its IP regime.

4. Zhejiang Case: Chinese Buyer Required to Withhold Tax in an Indirect Transfer

On 4 November 2016, China Taxation News reported that the Ningbo Local Tax Bureau in Zhejiang Province required a Chinese buyer in an indirect transfer to withhold and pay RMB57.3 million in EIT.5


In March 2016, the tax bureau received an inquiry from a Chinese enterprise about tax implications for its planned acquisition of a BVI company from four non-resident enterprises. The BVI company owned 100 percent equity in a PRC company located in Shanghai.

The buyer’s parent company, a PRC listed company, issued a public announcement that indicated the BVI target company had no substantial operational activities other than to manage the BVI company’s equity investment into China. After investigating, the tax bureau decided the substance of the transaction was to acquire the underlying PRC company owned by the BVI target. On this basis, the tax bureau re-characterized the transaction as a direct transfer of a China taxable property subject to PRC tax.

The tax bureau then had to decide how to determine each transferor’s share transfer price and cost in order to calculate their taxes payable. The news report does not provide details on this determination. Instead, it simply mentions that the tax bureau determined the cost of the transferred shares based on the BVI target company’s shareholder change record, board and shareholder meeting resolutions, and bank journal. As a result, the buyer withheld and paid RMB57.3 million in tax on behalf of the four transferors.


In this case, the in-charge tax authority for the withholding agent made the tax assessment and collected tax accordingly. The news report does not mention whether the in-charge tax authority of the underlying Chinese company in Shanghai also claimed the right to tax the indirect transfer. Transactional parties must always consider this possibility. In situations similar to this case, we have seen the in-charge tax authority of the underlying Chinese company claim tax rights. Thus, transactional parties often face a dilemma in choosing the tax payment location when the underlying Chinese company and the withholding agent are located in two different places.

Actually, the in-charge tax authority of the underlying Chinese company is in a better position to conduct the tax assessment because it is more familiar with the underlying Chinese company and has the power to require the non-resident enterprise to pay tax if the withholding agent does not withhold and pay the tax within seven days from when the tax liability arises6. However, the buyer as the withholding agent may incur tax penalties and face potential foreign remittance difficulties if it fails to pay the transaction taxes to its in-charge tax authority because the buyer would normally need to obtain a tax recordal form from its in-charge tax authority in order to remit currency abroad.

Currently, no guidance has been issued to solve this practical difficulty. As such, transactional parties must negotiate with the relevant tax bureaus and the remittance processing bank to find an appropriate solution.


1 Notice of the Ministry of Finance, the State Administration of Taxation, the Ministry of Commerce, the Ministry of Science and Technology and the National Development and Reform Commission on Increasing Model Service Outsourcing Cities Entitled to the Enterprise Income Tax Policies for Technology-advanced Service Enterprises, Cai Shui [2016] No. 108, dated 12 October 2016, retroactively effective from 1 January 2016.

2 The general EIT rate is 25 percent, and the general deduction cap for employee educational expenses is 2.5 percent of the salary expense.

3 See

4 See

5 See

6 Withholding agents normally struggle to meet the seven-day requirement.

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