The first time the SAT publicised its official reply on offshore indirect equity transfer
Recently, the State Administration of Taxation (SAT) publicised its official reply to the Shenzhen State Tax Bureau illustrating how to re-characterise an offshore indirect transfer of the equity interests in Chinese Tax Resident Enterprises (TRE) and impose Corporate Income Tax (CIT) on the transfer gains (referred to as ‛the SAT Reply’). As the first publicised SAT Reply after Guoshuihan  No. 698 (Circular 698), it recognises General Anti-Avoidance Rules (GAAR) as the legal basis to re-characterise and impose China CIT on offshore indirect equity transfers. It also provides clarifications on some important CIT treatments, e.g. allocation of total transfer proceeds, determination of cost base, and tax settlement. This SAT Reply is important in that it provides a useful reference on the SAT’s positions on the practical application of GAAR for both non-TRE and local-level tax authorities to follow. At the same time, it may also trigger more scrutiny and investigations by the Chinese tax authorities on offshore indirect equity transfers. The SAT Reply signifies how serious the Chinese tax authorities are on the enforcement of GAAR, in particular in respect of offshore indirect equity transfer which is seen as an obvious erosion of China tax base.
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