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Circular of the State Administration of Taxation on Strengthening Administration of Enterprise Income Tax on Non-Resident Enterprises' Equity Transfer Income

Guo Shui Han [2009] No. 698

State and local taxation bureaus of provinces, autonomous areas, municipalities under the Central Government and separately planning cities,

For the purpose of regulating and strengthening the administration of enterprise income tax on the non-residential enterprises’ equity transfer, relevant issues is, in accordance with the Income Tax Law of the People’s Republic of China and its Implementing Regulations, the Tax Administration and Collection Law of the People’s Republic of China and its implementing Details, the Circular of the State Administration of Taxation on Printing and Distributing the Provisional Measures for the Administration of Source-Based Withholding of Enterprise Income Tax on Non-Resident Enterprises (Guo Shui Fa [2009] No. 3) and the Circular of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Enterprise Income Tax Treatment on Enterprise Reorganization (Cai Shui [2009] No. 59), hereby notified as follows:

Article 1 The equity transfer income herein refers to the income made by non-resident enterprises transferring the equity of Chinese resident enterprises (exclusive of stocks of Chinese resident enterprises purchased to sell in the public securities market).

Article 2 In case a withholding agent fails to withhold or has no way to fulfill the withholding obligation, a non-resident enterprise should go to the competent taxation administration (the taxation organ is responsible to levy and collect the resident enterprise income tax) where Chinese resident enterprise to which equity has been transferred is domiciled to apply and report to pay the enterprise income tax within 7 days upon the equity transfer as prescribed in the contract and agreement (where a transferor gains the equity transfer income in advance, it shall be calculated according to the date of actually gaining the equity transfer income). For the resident enterprise that fails to report as it is on schedule, it shall be treated in accordance with relevant provisions in the tax levy and collection law.

Article 3 Equity transfer income herein refers to the balance of the equity transfer price deducted the equity cost price.

Equity transfer price herein refers to the amount in the forms of cash, non-currency assets or rights and interests by a transferor by transferring equity. If the share-held enterprise has the profits that has not been distributed or funds drawn after taxation and the amount a equity transferor transfers to which the shareholder owns the earning right shall not be deducted from the equity transfer price.

Equity cost price herein refers to the contribution actually paid by a transferor to a Chinese resident enterprise while investing to be shareholder or the equity transfer amount actually paid by a transferor to the former transferor of the equity while purchasing the equity.

Article 4 The calculation of equity transfer income shall be subject to the currency with which a non-resident enterprise invests in a Chinese resident enterprise that is transferred equity or purchases the equity from the former investors to compute equity transfer price and equity cost price. In case the same non-resident enterprise conducts multiple investments, it shall be subject to the currency with which it invests capital for the first time to compute the equity transfer price and equity cost price to use the method of weighted mean to compute equity cost price; in case currencies for multiple investments are inconsistent, it shall be subject to the currencies of the first investment calculated on the basis of exchange rates of the day when each investment is made.

Article 5 In case the actual tax burden of the country (region) where one equity-transferred overseas holding company is domiciled is lower than 12.5% or no tax is levied on the income of its overseas residents while an overseas investor (actually controller) indirectly transfers the equity of a Chinese resident enterprise, it should within 30 days upon the signing of the equity transfer contract offer to the competent taxation administration where an equity-transferred Chinese resident enterprise is domiciled the following documents:

(1)    Equity transfer contract or agreement;

(2)    Relations of an overseas investor and its transferred overseas holding company in capital, business and purchase and sale;

(3)    Statuses of production and operation, personnel, finance and properties of the overseas holding company with equity transferred by an overseas investor;

(4)    Ties of the overseas holding company with equity transferred by an overseas investor and a Chinese resident enterprise in capital, business and purchase and sale;

(5)    Explanations for reasonable commercial purpose of the establishment of an equity-transferred overseas holding company by an overseas investor; and

(6)    Other related documents required by the taxation administration.

Article 6 In case an overseas investor (actually controller) makes indirect transfer of the equity of a Chinese resident enterprise in the forms including abusing organization without reasonable commercial purpose to dodge the obligation of paying enterprise income tax, the competent taxation administration may reconfirm the quality of the equity transfer trading in accordance with the economic substance after reporting to the State Administration of Taxation for the examination and approval to negate the existence of the overseas holding company serving as taxpayer.

Article 7 In case a non-resident enterprise transfer the equity of a Chinese resident enterprise to its related party but the transfer price is disqualified for the principle of independent trading with due taxable income lessened, the taxation organ has the right to make adjustments in accordance with reasonable approaches.

Article 8 In case an overseas investor (actually controller) concurrently transfer the equity of domestic or multiple overseas holding companies, the equity-transferred Chinese resident enterprise should submit the whole transfer contract and part contracts related to the enterprise to the competent taxation administration. Where there are no part contracts, the equity-transferred Chinese resident enterprise should provide detailed documents of holding companies with equity wholly transferred to the competent taxation administration to accurately divide the transfer prices of domestic equity-transferred enterprise. Where no accurate division is made, the competent taxation administration has the right to choose reasonable method to make adjustments on transfer prices.

Article 9 In case a non-resident enterprise gaining the equity transfer income meets the conditions of special reorganization as prescribed in the Cai Shui [2009] No. 59 document with special taxation treatment chosen, it should submit written archival materials to the competent taxation administration to prove that it meets the conditions of special reorganization and thereafter be examined and approved by the taxation organ at the provincial level.

Article 10 The Circular shall enter into effect as of January 1, 2008. Please report to (the International Taxation Department of) the State Administration of Taxation timely the problems in the implementation of the Circular.

State Administration of Taxation

December 10, 2009

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