As foreign investors continue to seek out investment opportunities in China, there is a need for greater awareness of the implications of recent tax law developments, particularly with respect to the economic substance of and business purpose for using offshore holding structures. These developments are contained in the circulars Guoshuihan 601 and Guoshuihan 698.
These circulars were introduced by the State Administration of Taxation to regulate and tax certain transactions or arrangements which had previously enjoyed tax treaty relief or were otherwise not subject to PRC tax, particularly where offshore holding structures are used. Both circulars were issued in 2009, although Circular 698 has retrospective application as from 1 January 2008.
Both circulars are relevant in the wider context of the application of China’s general anti-avoidance rules (GAAR), which were first introduced in January 2008 as part of the new corporate income tax law. The GAAR rules operate widely and give the tax authorities significant discretion in challenging transactions that are not undertaken with reasonable business purposes (i.e. where the taxpayer is primarily entering into the transaction to gain a tax benefit).
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Darren Bowdern and Christopher Xing are tax partners at KPMG China
8/F Prince’s Building, 10 Chater Road,
Central, Hong Kong
+852 2826 7166 (Darren Bowdern)
+852 2978 8965 (Christopher Xing)