On February 3, 2015, the State Administration of Taxation of People’s Republic of China issued the “Announcement on Issues Concerning Nonresident Enterprise Indirect Transfer of Property Enterprise Income Tax” (2015 Bulletin No. 7, “Bulletin 7”)
Bulletin 7 is to be effective on February 3, 2015 and concurrently, article 5 and 6 of the “Notice on Strengthening the Administration of Enterprise Income Tax on Income from the Transfer of Shares by Nonresident Enterprises” (Guoshuihan [2009] Circular No. 698, “Circular 698”) are repealed.
Articles 5 and 6 of Circular 698 primarily stipulate the determination on whether a nonresident enterprise whose ownership has been transferred may be deemed to carry a reasonable commercial purpose (合理商业目) and the treatment of such enterprise should such a purpose be deemed. Upon the repeal of these two articles, Bulletin 7 has become the main official document for matters relating to taxation on indirect transfer of stock rights of resident Chinese companies or their assets and to the corresponding procedures.
Compared with Circular 698, the newly announced Bulletin 7 is clearly drafted and is outlined with straightforward procedures. The major clarifications from Bulletin 7 are as follows:
1. any transaction of indirect transfer of stock rights or assets is taxable in accordance to paragraph 3 of article 3 of Enterprise Income Tax Law; the tax rate shall be 10%;
2. the standard for the determination of a reasonable commercial purpose (合理商业目) is expounded in article 3 of Bulletin 7;
3. should the transfer be deemed as one of those described in article 4 of Bulletin 7, a reasonable commercial purpose (合理商业目), by ipso facto, is deemed not to be;
4. should the reorganization of a non-resident group of companies satisfies any condition as mentioned in article 6 of Bulletin 7, a reasonable commercial purpose (合理商业目), by ipso facto, is deemed to be; and
5. a transferee of a share transfer transaction is deemed to be the default obligor for the related Company’s income tax obligation; if the related transferor fails to declare to the taxation authority on the transfer, the taxation authority, nevertheless, has the right to impose the obligation on the transferee; the obligation on the transferee may be reduced or removed if the transferee, after an agreement is made for the share transfer transaction, informs the taxation authority according to the provisions.