Chinese TRE concept - a new way to impose China tax on offshore indirect equity transfer
According to a recent report in the China Taxation News (the Public Report), the Jiamusi (in Heilongjiang province of China) State Tax Bureau (STB) has collected a significant amount of China tax on the gains from a transfer of an offshore listed company that held equity interest in Chinese underlying companies (offshore indirect equity transfer). What makes this case special is that the Jiamusi STB did not use circular Guoshuihan  No. 698 (Circular 698) and the General Anti-Avoidance Rules (GAAR) to disregard the existence of the offshore holding company; instead, it adopted the Chinese Tax Resident Enterprise (TRE) concept to deem the offshore holding company as a TRE and impose tax on the direct transfer of the deemed TRE.
Use of the TRE concept by the Chinese tax authority to challenge offshore indirect equity transfer is the first case we have seen. It is also the first for the authority to take initiative to deem an offshore company as a Chinese TRE to collect tax. Foreign investors who plan to indirectly acquire or dispose equity in Chinese companies should appreciate how the Chinese tax authority could apply the concept of TRE to impose China tax on an offshore indirect equity transfer.
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