New regulations for Notice 698 to clarify key taxation issues

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In the August/September 2012 issue of Baker & McKenzie’s newsletter, China Tax Monthly, we reported that the State Administration of Taxation (SAT) will issue supplementary regulations to clarify the indirect transfer rules under Notice 698. More recently, it has been reported that these new regulations will be finalised and issued in the near future to replace the indirect transfer rules under Notice 698 (and other supplementary regulations) and will clarify some key issues under the existing regulations.

BLD4First, the new regulations will provide a safe harbour for internal reorganisations. One major criticism of Notice 698 has been that it is overly broad. Many legitimate transactions with reasonable commercial purposes, particularly internal reorganisations, have been caught by the notice.

The new regulations will address this over-breadth in part and provide a safe harbour for internal reorganisations. Qualified internal reorganisations will be exempt from enterprise income tax (EIT) and have reduced filing requirements, i.e. only the pre- and post-transaction organisational charts and a brief explanation of the reasonable commercial purpose of the reorganisation will need to be filed with the tax authorities.

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Business Law Digest is compiled with the assistance of Baker & McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker & McKenzie by e-mail at: Zhang Danian (Shanghai) danian.zhang@bakermckenzie.com

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