A totally different tax landscape for offshore indirect transfer – wider, clearer & more challenging
According to the circular Guoshuihan  No. 698 (Circular 698) issued by the State Administration of Taxation (SAT) in 2009, a transfer of a foreign company that holds the equity interest in an underlying China Tax Resident Enterprises (TREs) (hereinafter as the ‘offshore indirect equity transfer’) may be subject to China Corporate Income Tax (CIT), if the arrangement is considered as an abusive use of company structure without reasonable commercial purpose. Such provision had a wide-spread impact as many foreign investors invest in China via a foreign intermediate holding company. The SAT has been working in the last couple of years to improve the tax rules in relation to such offshore indirect equity transfer.
In early February 2015, the SAT released a Public Notice  No. 7 (Public Notice 7) to supersede the current Chinese tax rules in relation to the offshore indirect equity transfer. Public Notice 7 introduces a new tax regime that is significantly different from that under Circular 698. Firstly, it opens the China tax net wider to capture not only offshore indirect equity transfer transactions addressed under Circular 698 but also transactions involving transfer of immovable property in China and assets held under the establishment and place (E&P) in China of a foreign company through the offshore transfer of a foreign intermediate holding company (collectively called ‘offshore indirect transfer of China Taxable Properties’). Public Notice 7 also addresses the term ‘transfer of the equity interest in a foreign intermediate holding company’ widely. In addition, Public Notice 7 provides clearer criteria than Circular 698 on how to assess ‘reasonable commercial purposes’ and introduces ‘safe harbour’ scenarios. However, it also brings challenges to both the foreign transferor and transferee of the offshore indirect transfer as they have to make self-assessment on whether the transaction should be subject to CIT and to file or withhold the CIT accordingly.
Public Notice 7 presents a totally different tax landscape for foreign investors holding China Taxable Properties with foreign intermediate holding company structure. These foreign investors should plan ahead as and when they invest, hold and divest their China Taxable Properties to manage their China tax exposures.
Also enclosed are full text of Public Notice 7 and SAT's official interpretation, together with the unofficial English translation and salient points of Public Notice 7 prepared by PwC.