China FS Tax News Flash 

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May 2013, Issue 2

A Business Tax case on disposal of "A" shares that has landmark implications for private equity funds

Business Tax ("BT") on disposal of listed "A" shares by both domestic and foreign private equity funds that have invested in these shares as pre-listing strategic investor has been an unclear China tax issue. The uncertainty mainly lies in the taxation scope and the deduction cost base. It is important for those foreign investors who have divestment plan to get prepared for this BT exposure as BT is generally not protected by any tax treaties.

Recently, there is a BT case widely reported in China. This case happened in Guangxi where BT (and associated surtaxes) were collected in respect of disposal of "A" shares which were originally acquired as non-tradable equity investment by a non-financial enterprise (non-private equity fund).

Information on disposal of "A" shares that were acquired before listing is available in public domain. Private equity fund investors should be mindful of their potential China BT exposure on their similar transactions and this recent reported case should serve a good reference in understanding their potential BT exposure.

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