International Tax

Introduction

Companies face a number of tax challenges in China throughout all stages of their business cycle (i.e. entry, operation and exit). China’s tax laws and regulations are continuously being updated and refined. This, coupled with the fact that the local practice and enforcement of China’s various tax laws and policies is not always consistent, makes the tax landscape difficult to navigate and it increasingly important to seek specialised advice.

International tax challenges in China

As companies established in China further expand and grow throughout the PRC and other locations, they need to be mindful not only of their PRC tax strategy, but also the international tax challenges which may impact their activities.

We have provided below some typical examples from a China perspective:

Beneficial ownership
In order to access preferential withholding tax rates in China’ s tax treaties, the beneficial ownership test must be satisfied. The concept of ‘beneficial owner' is not a defined term under China’s Corporate Income Tax (CIT) law. However, the Chinese tax authorities have released guidance on this concept. Broadly, to satisfy the beneficial ownership test, a foreign recipient needs to demonstrate that it conducts substantive business activities in the residence treaty jurisdiction as well as have control over the China-sourced income.

Permanent establishment
Foreign companies that have not set up a legal entity in China should still be mindful that they may be subject to PRC taxes under certain scenarios. One such circumstance is if the foreign company creates a permanent establishment (PE) in China.

A PE can be created in a number of ways and includes a fixed place of business, sending employees into China for a certain time period exceeding relevant thresholds, dependent agents executing contracts etc.

Indirect transfer
China has detailed indirect transfer rules and these are regularly invoked. Under normal circumstances, if a foreign company indirectly disposes a PRC company by selling the foreign intermediate company or SPV holding the PRC company, such a transaction would be outside the scope of the China taxation net. However, under China’s indirect transfer rules, the foreign enterprise should generally report the indirect transfer. If the local tax bureau forms the view that the transaction lacked a legitimate business purpose, it could re-characterise the indirect transfer as a direct transfer of the PRC company and impose tax on any gains arising.

Re-organisation?
The Chinese tax re-organisation rules provide for complete or partial tax deferral on gains realised in a tax re-organisation transaction that meets prescribed conditions. Tax re-organisations are quite complex. Usually, many different government bodies, in addition to the relevant tax bureaus need to be involved, and little guidance is provided by these bodies to facilitate the reorganisation. As a result, significant hurdles exist for companies to successfully carry out a re-organisation and secure the desired tax deferral treatment in China.

Anti-avoidance
There is a General Anti Avoidance Rule (GAAR) provision in the CIT law allowing the Chinese tax authorities to make adjustments to taxable revenue or taxable income where business arrangements, structures, or transactions are entered into without reasonable commercial purpose and result in a reduction, exemption, or deferral of tax payment.

How Dezan Shira & Associates can help

Dezan Shira’s international tax team has the depth and breadth of experience across all main industry sectors, as well as the ability to apply best practices to ensure the management of international taxes is handled effectively.

Our tax services professionals can provide PRC and international tax advice in the following areas:

  • Taxation advice associated with the entire life cycle of your company’s business (entry, operation and exit)
  • Holding and financing structure review and optimisation to ensure efficiency from tax, commercial and finance perspectives
  • Cross-border transaction advice and planning
  • Withholding tax leakage minimisation, cashflow maximisation and profit repatriation strategies
  • Intellectual property planning and strategies
  • Mergers & Acquisitions
  • Corporate tax compliance
  • Tax controversy and dispute resolution
  • Individual income tax advice
  • Ad-hoc advisory and consulting covering PRC, Hong Kong as well as APAC tax issues.

The abovementioned services are intended to highlight the range of services we currently provide our clients. We would be pleased to have a conversation with you to hear about your particular needs and requirements. From there, we can prepare a precise scope of work and fee proposal taking these into account.

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