Q&A

In determining whether the non-resident company is indeed the beneficial owner of the royalties, the tax authorities will apply a “substance over form” principle and conduct analysis based on the actual circumstances of the case. In general, the following factors are disadvantageous to an applicant’s determination as beneficial owner:

• The applicant is obligated to pay or distribute all or the majority of its income (e.g., 60 percent and above) to residents of a third country (region) within a stipulated period (e.g., within 12 months from receipt of income);
• Except for holding properties or rights from which income is derived, the applicant has little or no other business activities;
• Where the applicant is a corporation, its assets, scale of operations, and staging are relatively small (or few) and not commensurate with the amount of income;
• The applicant has little or no control or right of disposal over income or properties or rights from which income is derived, and bears little or no risk;
• The counterparty country (region) of the tax agreement does not levy tax or exempt tax on the relevant income, or the actual levy rate is very low;
• Aside from loan contracts upon which interest is derived and paid, there exist other loan or deposit contracts between the creditor and a third party which are similar in terms of amount, interest rate and date of execution, etc;
• Aside from contracts for the transfer of copyrights, patents, proprietary technologies and other use-rights based upon which royalties are derived and paid, there exist contracts between the applicant and a third party pertaining to the transfer of copyrights, patents, proprietary technologies and other usage rights or ownership.