The foreign investor will be required to provide the required documents to the relevant tax authorities within 30 days of signing of equity transfer contract. After reviewing the documents, if the tax authorities believe that there is a lack of reasonable business purpose, and an economic interest in a Chinese company or asset is transferred by the transaction, Chinese tax authorities are likely to conclude that the transaction was tax motivated, and therefore, may disregard the existence of the offshore holding company based on substance over form principle. If the existence of offshore holding company is disregarded, the indirect transfer would be re-characterized by the Chinese tax authorities as a direct disposal and the foreign investor will be subject to withholding tax in China.

• The equity transfer contract or agreement
• Documents illustrating the relationship between the foreign investor and the SPV with respect to funds, management, and purchase and sale activities
• Documents illustrating the business operations, personnel, financial accounts and properties of the SPV
• Documents illustrating the relationship between the SPV and Chinese investee company with respect to funds, management, and purchase and sale activities
• Explanation of the foreign investors reasonable business purpose in setting up the SPV
• Other relevant information required by the tax authorities

State Administration of Taxation
Address: Yangfangdian Road, Haidian District, on the 5th
Zip: 100038
Tel: 010-63417114
Website: http://www.chinatax.gov.cn

State Administration for Industry and Commerce People's Republic of China
Address: 8 Sanlihe Donglu, Xichengqu, Beijing, 100820, P. R. China
Phone: +86-10-68010463/68013447
Facsimile: +86-10-68010463/68013447
Email: dfa@saic.gov.cn
Contact
Address

As an effort to tackle tax base erosion and profit shifting, China tax authorities have been focusing on transfer pricing administration by enforcing stringent strong local-flavoured transfer pricing regulations/rules, imposing detailed compliance requirements and invoking ever-increasing scrutiny on related party transactions. Since there are only limited levels of tax appeal in China, most taxpayers will want to avoid a tax dispute getting to the assessment stage. In this connection, the companies should therefore assess their risks and document their transfer pricing policies in their China operations.

Explain the fees structure which is required for obtaining the certificate/document.

Explain the time until which the certificate/document is valid.
e.g. Birth Certificate Valid Forever

Please attach documents that can be used by people. e.g. links

Please attach sample completed documents that would help other people.

Please explain processing time taken in obtaining the document/certificate.

Videos explaining the procedure or to fill the applications. 
Attach videos using the following tag <&video type="website">video ID|width|height<&/video&> from external websites.
Please remove the "&" inside the tags during implementation.
Website = allocine, blip, dailymotion, facebook, gametrailers, googlevideo, html5, metacafe, myspace, revver, 
sevenload, viddler, vimeo, youku, youtube
width = 560, height = 340, Video ID = Can be obtained from the URL of webpage where the video is displayed.
e.g In the following url "http://www.youtube.com/watch?v=Y0US7oR_t3M" Video ID is "Y0US7oR_t3M". 
	

The complex Chinese legal framework, foreign exchange concerns, lengthy approval process pose some challenges to the foreign investors opting for direct equity transfer in China. Therefore, many foreign investors prefer to utilize offshore holding company that is established in transparent and administratively open jurisdictions offering favorable tax treatment and in certain cases, even tax-free treatment as explained below:

• If an offshore holding company is established in a jurisdiction that has a favorable tax treaty with China, the offshore holding company may benefit from preferential withholding tax rates and withhold taxes on dividends paid by the Chinese subsidiary to the offshore holding company.
• If the foreign investor wants to dispose of his interests in China, it may sell the shares of the offshore holding company without triggering income tax on capital gains in China.
• Further, if the jurisdiction where intermediary offshore holding company is established also exempts capital gain from any tax liability or taxes it at a low rate, then the foreign investor can sell its equity interests in China resident enterprise without incurring any tax liability or a very little tax liability.

• The name and the number of the ID card, passport or other valid ID document of the institution, legal representative or owner
• The residence or business address
• The type of registration
• The accounting system
• The form of production and business operation
• The scope of production and operation
• The total amount of capital (fund), investment
• The term of production and operation
• The name and telephone number of the financial chief
• Other information specified by the State Administration of Taxation

A transfer tax is a tax on the passing of title to property from one person (or entity) to another. In a narrow legal sense, a transfer tax is essentially a transaction fee imposed on the transfer of title to property.

Circular 698, one of the loosely drafted articles, deals with such sophisticated matter as equity transfer with succinctness leaving ambiguity around it as to its scope, application, procedure and reporting requirements. Having recognized the perplexity of the circular, early this year, the SAT issued announcement 24 addressing various implementation issues in relation to Circular 698. Although announcement 24 becomes effective from April 1, 2012, it can also apply retrospectively to the unresolved issues. Some of the issues addressed are as follows:

Timing of revenue recognition: If the non-resident enterprise is directly disposing of an equity interest in a resident enterprise in China and the contract for equity transfer adopts installment payment method, the non-resident enterprise will recognize the realization of revenue when the equity transfer contract becomes effective and the procedure for changing equity ownership is completed.

What is meant by the procedure for changing equity ownership is completed is not very clear and can be interpreted in more than one ways. For instance, whether the equity ownership procedure is considered completed when the Ministry of Commerce has approved the transfer or when the local authorities have approved the transfer. Therefore, it is advisable to contact the tax authorities in charge for further clarifications.

Clarification on transfer of equity traded in open stock exchanges- an exception: Income from transfer of equities in Chinese resident enterprises that are traded in the open stock exchanges are excluded from the scope of Circular 698 because these are those transactions where the counterparties, quantities and sales consideration and equity costs are determined by the trading rules of open stock exchanges. Therefore, based on Announcement 24, it can be easily concluded that private placements, off exchange sales and all pre-IPO transactions will be subject to Circular 698.

Foreign investors (effective controlling parties): The term effective controlling party is not just confined to those investors which have effective control over the Chinese resident enterprises but also to those foreign investors that indirectly transfer shares in Chinese resident enterprises and have minority interest in the company.

Effective tax and Do not impose corporate income tax:The term effective tax refers to the effective tax burden with regard to the income from the transfer of equity interests and not the statutory rate applicable to the entity. The phrase do not impose corporate income tax refers to those transactions only that are not subject to income tax and does not refer to other offshore income of the non-resident enterprises.

Indirect share transfer involving multiple foreign investors: Where two or more foreign investors dispose of the equity interest in Chinese resident enterprise at the same time, one foreign investor may represent all other foreign investors while notifying the Chinese tax authority- in charge of the Chinese resident enterprise of indirect equity disposal and providing the relevant information.

Indirect share transfer in more than one Chinese resident enterprise: If a foreign investor transfers equity interest in two or more Chinese resident enterprises at the same time, and the Chinese resident enterprises are not located in the same province or municipality, the foreign investor may choose to notify the tax authority in charge of any of the Chinese resident enterprises of transfers only. If the tax authority decides that the tax will be imposed, the foreign investor will pay the tax to the tax authorities in charge of Chinese resident enterprises separately.

If the foreign investor wants to dispose of his interests in China, it may sell the shares of the offshore holding company without triggering income tax on capital gains in China.

Tax Law

State Administration for Industry and Commerce People's Republic of China

[http://www.chinatax.gov.cn/ State Administration of Taxation of the People's Republic.

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