China Tax/Business News Flash

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Jan 2012, Issue 2

Further clarifications on RMB reinvestments by Chinese holding companies

In August 2011 Issue 17 of our China Tax and Business News Flash, we introduced the new requirement set out by the State Administration of Foreign Exchange ("SAFE") in its Circular Huizihan [2011] No.7 ("Circular 7") on 29 March 2011.  It requires that Chinese Holding Companies ("CHCs") shall convert their legitimate RMB proceeds to registered capital by applying for capital increase before using the same RMB to reinvest in their Chinese subsidiaries (hereinafter referred as to "New Requirement").  As such, a CHC would be deemed to make distribution of dividend to its foreign investor and the latter would consequently be subject to China’s withholding income tax.  Furthermore, the New Requirement could simultaneously bring about potential tax implications to the foreign investors in their home countries arising from such deemed distribution of dividends.  Therefore, Circular 7 has attracted widespread attention from multinationals which have either established a CHC or are considering establishing a CHC.
On 12 December 2011, the Ministry of Commerce and the SAFE jointly released the Circular Shangzihan [2011] No.1078 ("Circular 1078") to clarify the New Requirement set out in Circular 7 and address other administration issues.  Circular 1078 has provided clarifications which rectify the adverse impacts of Circular 7.
In this issue of News Flash, we will highlight the key messages of Circular 1078 and share our observations.
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