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On 6 February 2018, the State Administration of Taxation (SAT) released the Bulletin on Issues Relating to Beneficial Owner in Tax Treaties (Bulletin 9)1. Bulletin 9 takes effect on 1 April 2018, and replaces China’s existing anti-treaty shopping rules in Circular 6012 and Bulletin 303.

1. Background

China's efforts to combat treaty shopping precede the OECD's BEPS action plans. In 2009, the SAT issued Circular 601, which was a unilateral interpretation of the beneficial ownership concept in China’s bilateral income tax treaties. Circular 601 has posed a major challenge to non-Chinese multinational companies (MNCs) deriving dividend, interest or royalty income from China and seeking to benefit from lower withholding tax rates under China’s income tax treaties. To enjoy these preferential withholding tax rates, the income recipient must perform substantial business activities in its
country of tax residence and cannot be viewed as a conduit with respect to the China-sourced income. In later years, the SAT issued additional guidance on beneficial ownership in Bulletin 30, Circular 1654 and Bulletin 245. Although these subsequent notices clarified certain specific issues under Circular 601, they did not materially improve the situation for MNCs.

In 2017, the State Council issued two bulletins calling on lower-level government authorities, including the SAT, to identify and adopt concrete measures to enhance the investment environment for MNCs doing business in China. The objective was to encourage MNCs to put more capital into China to help drive China’s economic growth. One example of such a measure in the tax area is the dividend reinvestment incentive under Notice 886, which is intended to incentivize MNCs to reinvest earnings in China rather than to repatriate them. We discussed this new incentive in our last client alert7.

Bulletin 9 may be seen as the latest tax notice aimed at enhancing the competitiveness of China’s investment environment. Although Bulletin 9 does not fundamentally change the underlying principles of beneficial ownership determination in Circular 601, it provides greater certainty to foreign investors by prescribing more detailed guidance on how the beneficial ownership test should be applied in practice. Most notably, it expands the beneficial ownership safe harbor rule in Bulletin 30 and introduces a new "derivative benefits test" that will create more opportunities for MNCs to meet the beneficial ownership test and thereby to access lower withholding tax rates under China’s tax treaties.

1 State Administration of Taxation's Bulletin on Issues Relating to "Beneficial Owner" under Tax Treaties, SAT Bulletin [2018] No. 9, dated 3 February 2018, effective from 1 April 2018.
2 The Circular of the State Administration of Taxation on the Interpretation and Determination of "Beneficial Owner" Under Tax Treaties, Guo Shui Han [2009] No. 601, dated 27 October 2009.
3 The State Administration of Taxation's Bulletin on the Determination of "Beneficial Owner" Under Tax Treaties, SAT Bulletin [2012] No. 30, dated 29 June 2012, effective as of the same date.
4 The State Administration of Taxation's Opinions on Handling Beneficial Owner Cases Involved in the Implementation of the Dividends Provision under the Taxation Arrangement between Mainland China and Hong Kong by the Provincial and Municipal State Tax Bureaus in Places such as Hubei, Shui Zong Han [2013] No. 165, dated 12 April 2013.
5 The State Administration of Taxation's Bulletin on Issues Relating to the Determination of Beneficial Owner in Entrusted Investment, SAT Bulletin [2014] No. 24, dated 21 April 2014, effective as of 1 June 2014.
6 Notice of the Ministry of Finance, the State Administration of Taxation, the National Development and Reform Commission and the Ministry of Commerce Concerning the Deferral of Withholding Tax on Dividends Directly Invested by Foreign Investors, Cai Shui [2017] No. 88, dated 21 December 2017, retroactively effective from 1 January 2017.

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