On March 28, 2011, China’s State Administration of Taxation (“SAT”) issued Announcement No. 24 regarding Several Problems of Regulation on Income Tax of Non-resident Enterprises (the “Announcement”), effective beginning April 1, 2011. The Announcement applies to all outstanding tax liabilities incurred but not paid before April 1, 2011.
Continue Reading...Beginning December 1, 2010, foreign-invested enterprises, foreign enterprises, and foreign individuals are now required to pay the city maintenance and construction tax as well as the education surcharge, from which these entities and individuals were formerly exempt. Prior to this regulation, the PRC levied those taxes only on Chinese-owned and funded enterprises and Chinese citizens.
Continue Reading...On March 22, 2010, the Ministry of Commerce, State Administration of Taxation, General Admission of Customs and the Ministry of Finance jointly issued a circular (Shangzifa [2010] No. 93, "Circular 93") to clarify procedures for the examination and approval of tax exemptions and refunds for purchase of equipment in China made by foreign-invested R&D centers.
Continue Reading...China’s State Council has recently released the amended Regulations for the Implementation of the Audit Law of the People's Republic of China (hereafter, the “New Audit Regulation”) applicable starting May 1, 2010. Compared with the amended Audit Law of the People's Republic of China (hereafter, the “New Audit Law”), the New Audit Regulation sets forth the power of auditing authorities more specifically.
Continue Reading...Mergers
A merger involves two or more enterprises forming a single legal entity (either existing or new) through combining their assets and liabilities. In China, the two methods through which a merger can be transacted are the absorption of an existing company or the creation of a new entity. Though the former resembles an acquisition, different tax rules apply if the transaction is recognized as a merger.
The M&A rules recognize a deal as either an ordinary reorganization or a special reorganization, and different tax treatments apply accordingly. In terms of acquisitions, the major difference in tax treatment between ordinary and special reorganizations is the tax basis used for calculating the gain/loss from the transaction and the time point at which this gain/loss is recognized. Furthermore, according to Article 7 of the M&A rules, an acquisition between a domestic Chinese enterprise and a foreign enterprise (which in this case includes those domiciled in Hong Kong, Macao, and Taiwan) must meet one of the additional conditions below in order to qualify as a special reorganization[1]:
Continue Reading...China’s new tax law went into effect in January of 2008. This development has had important effects on tax structures used by foreign investors doing mergers and acquisitions in China. It has influenced the strategies firms employ in pursuing “enterprise reorganization” projects involving domestic Chinese enterprises, including mergers, share acquisitions, and asset acquisitions among other transaction types. In April of 2009, China’s Ministry of Finance and State Administration of Taxation ("SAT") issued Caishui [2009] No. 59 (the "M&A Rules"). Some of the most significant aspects of these new rules are described below.
Continue Reading...On February 20, 2010, China's State Administration of Taxation (the "SAT") issued a Notice On Interim Measures For Tax Administration Of Representative Offices Of Foreign Enterprises (Guoshuifa [2010] No. 18, also referred to as "Circular 18"). Circular 18 states measures governing enterprise income tax (EIT), business tax, and value added tax (VAT) on representative offices of foreign enterprises (including those in Hong Kong, Macau and Taiwan). It takes effect retroactively as of January 1, 2010.
Continue Reading...On January 26, 2010, the State Administration of Tax (the "SAT") issued another Notice on Issues Concerning Implementing Royalty Clauses in Tax Treaties (Guishuifa [2010] 46, also referred to as "Circular 46"), further clarifying treaty treatment for technical know-how.
Continue Reading...On October 27, 2009, the Chinese State Administration of Taxation (“SAT”) issued a Notice, "How to Understand and Determine the 'Beneficial Owner' in Tax Agreements" (Circular No. 601, hereinafter referred as to the “Notice”). This Notice clarifies the definition of beneficial ownership for purposes of avoiding double-taxation and appropriately reducing tax burdens.
Continue Reading...In October, 2009, two regulations were issued regarding value added tax (VAT) treatment in China. One regulation clarifies the value added tax (VAT) treatment of certain asset reorganizations between publicly traded companies (PTC) and their holding companies. The other exempts foreign-owned research and development (R&D) centers from taxes on imports of listed equipment and grants foreign and Chinese-owned R&D centers full VAT refunds on purchases of certain domestically made equipment.
Continue Reading...In the beginning of 2009, the Chinese government set a target for annual tax growth of 8.2%. Due to the financial crisis, tax revenue has dropped 10.3% in the first quarter and 6% in the first half of the year compared with the same periods of last year. Therefore, China’s State Administration of Taxation ("SAT") has started to put more emphasis on tax inspection. Tax inspection is a regular function for the SAT, and a common practice internationally. But now China is expanding its scope.
Continue Reading...China’s State Administration of Taxation (“SAT”) issued a Notice on the Issues concerning the Application of Royalty Clauses in Tax Treaties (Circular No. 507, hereinafter referred to as the “Circular”) on September 14, 2009. The Circular clarifies the definition and scope of royalty clause involved in tax treaties to avoid double taxation and to prevent fiscal evasion with respect to taxes on income. It will be effective on October 1, 2009.
Continue Reading...On August 25, 2009, China's State Administration of Taxation (SAT) issued Administrative Rules on Nonresident Enjoying Tax Treaty Treatment (Guoshuifa 2009 No.14) ("The Rules"). The Rules provide detailed guidance for nonresidents seeking concessions (except for international traffic) provided in applicable tax treaties. The Rules will take effect on Oct 1, 2009.
Continue Reading...On March, 27, 2009, China’s Ministry of Finance (“MOF”), State Administration of Taxation (“SAT”) and General Administration of Customs jointly issued Notice of Some Issues related to Taxation Policies on Supporting the Development of Cultural Enterprises (the "Notice"). The Notice extends a series of tax benefits for cultural and media enterprises through December 31, 2013.
Continue Reading...On April 30, 2009 the PRC Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Notice of Some Issues Associated with Income Tax Treatment of Enterprise Restructuring (Cai Shui [2009] No. 59) (“Notice 59”) relating to China's tax treatment of certain corporate restructuring transactions. The rules introduced in Notice 59 have retroactive effect to January 1, 2008.
Continue Reading...New tax rules relating to the tax treatment of certain corporate restructuring transactions are expected to be finalized soon by the PRC Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”).
Under China’s pre-2008 foreign enterprise income tax (“FEIT”) regime, the SAT issued guidance on the tax treatment of corporate restructuring transactions, including Guo Shui Fa [1997]. No 71 (“Circular 71”) and Guo Shui Han Fa [1997].No 207 (“Notice 207”). Circular 71 provided detailed guidelines on the tax treatment of corporate restructuring transactions, including mergers, spin-offs, asset transfers and share restructurings. Notice 207 confirmed that a foreign investor could transfer its equity interest in a Chinese enterprise to a 100% related enterprise at cost, provided a commercial-purpose test could be satisfied. The guidance provided in Circular 71 and Notice 207 was interpreted by many foreign investors as indicating preferential tax policies under the FEIT regime.
On March 23, 2009, China's Ministry of Finance and State Administration of Taxation jointly issued a Notice on the Policy of Enterprise Income Tax for China Clean Development Mechanism Fund ("CCDMF") and China Clean Development Mechanism ("CCDM") Projects (hereinafter referred as to the “Notice”) to introduce new tax incentives for CCDM projects and the CCDMF. The Notice has retroactive effect from January 1, 2007.
Continue Reading...The role of income tax treaties is important at a time when international trade and transactions continue to increase. Countries enter into income tax treaties – also known as double taxation agreements or double tax treaties – on bilateral basis to prevent double taxation (i.e., taxes levied by both countries on the same income, profit, capital gain, inheritance or other item). China has entered into such treaties with more than 80 countries and territories.
Continue Reading...On January 23, 2009, China's State Administration of Taxation (“SAT”) issued a Notice on the Issues Concerning Withholding the Enterprise Income Tax on the Dividends and Interest Paid by Chinese Resident Enterprises to Qualified Foreign Institutional Investors (“QFIIs”) (hereinafter referred to the “Notice”). The Notice clarifies some withholding tax rules relating to QFIIs under both the Enterprise Income Tax Law of China (hereinafter referred as to the “EIT Law”) and the Regulation on the Implementation of the Income Tax Law of China (hereinafter referred to as the “EIT Regulation”).
On January 1, 2009, China abolished the Interim Regulations on Urban Real Estate Tax. Under those regulations, the Urban Real Estate Tax had been levied on real property purchased in China by: 1) Chinese enterprises with foreign investments; 2) foreign enterprises; or 3) foreign individuals (all three collectively referred to below as "Foreign Investors"). As a result of this change, Foreign Investors who purchase real property after January 1, 2009, are now subject to China's Interim Regulations on Real Property Tax (i.e., the same regime applicable to domestic Chinese owners of real estate).
Implementing Regulations Relating to PRC Business Tax
In China, a 5% "business tax" is imposed on the gross amount received for certain services and the transfer of certain intangible and immovable properties. On December 25, 2008, the Ministry of Finance of the People’s Republic of China (“MOF”) and the State Administration of Taxation of People’s Republic of China (“SAT”) jointly issued the Implementation Rules of the Provisional Regulations of the PRC on Business Tax (“BT Rules”). The BT Rules became effective on January 1, 2009.
While the BT Rules revised the previous regulations issued in 1993 in a number of respects, the major changes include (i) broadening the definition of taxable Chinese services; and (ii) the coordination of the BT Rules with the new Implementation Rules for Provisional Regulations of the PRC on Value-added Tax (“VAT Rules”).
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