SAT clarifies beneficial ownership under China-HK agreement

0
1530
LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link

Further to Guo Shui Han (2009) No. 601 and State Administration of Taxation (SAT) bulletin (2012) No. 30, the SAT issued Shui Zong Han (2013) No. 165 to clarify the beneficial ownership determination under the dividend provision of the China-Hong Kong double taxation agreement (DTA).

Clarification of notice 601

Notice 601 provides a list of negative factors for determining an applicant’s beneficial owner status under tax treaties. The factors that notice 165 clarifies are as follows:

  1. The applicant is under an obligation to distribute all or the majority – e.g. more than 60% – of the China-sourced income to a resident of a third jurisdiction within a specified period (e.g. 12 months). According to the clarification under notice 165, if the applicant has not distributed dividends to a non-Hong Kong resident company, it will not be considered a negative factor under the beneficial ownership determination.
  2. The applicant conducts little or no business activities, other than holding the properties or rights that generate the income received. Notice 165 clarifies that “business activities” include investment activities. The tax authorities may not deny DTA relief solely because the applicant only holds a single investment. This clarification could mean that the applicant may obtain beneficial owner status even if holding only one investment, provided that the applicant does not fall within any other negative factor.
  3. The entity (e.g. corporation) applicant’s assets, size of operation and personnel are disproportionately small compared to the income received. First, notice 165 requires a comprehensive analysis to determine whether the applicant’s assets are disproportionate to its income. This analysis should not equate “assets” with registered capital. If an applicant has disproportionately small registered capital, the source of its funding and the investment risks it bears should be analysed to determine whether its assets are commensurate with the income received. Second, notice 165 also adopts the substance over form principle to determine whether the applicant’s staffing is commensurate with the income received. When conducting this analysis, the functions of the staff should be reviewed and analysed.
  4. The recipient does not, or usually does not, have the right to control or dispose of the income, or the properties or rights giving rise to the income, and bears little or no risk. In assessing this factor, notice 165 requires the tax authorities to analyse: i) whether relevant legal documents, such as the articles of association, have granted the applicant relevant rights to control or dispose of the income or properties; and ii) whether the applicant has exercised these rights at its own discretion. The tax authorities may not make a negative conclusion on this factor solely based on the fact that the recipient’s shares are controlled by the recipient’s holding company.
  5. The applicant is exempt from tax or is not subject to tax in the resident jurisdiction with respect to income received from China, or the recipient pays tax in the resident jurisdiction but at an extremely low effective tax rate. Notice 165 clarifies that the Hong Kong rule, which exempts income derived outside Hong Kong from being taxed in Hong Kong, does not constitute a main negative factor when assessing beneficial ownership. The applicant should be assessed comprehensively based on the applicant’s tax filing status under Hong Kong law.

You must be a subscribersubscribersubscribersubscriber to read this content, please subscribesubscribesubscribesubscribe today.

For group subscribers, please click here to access.
Interested in group subscription? Please contact us.

你需要登录去解锁本文内容。欢迎注册账号。如果想阅读月刊所有文章,欢迎成为我们的订阅会员成为我们的订阅会员

已有集团订阅,可点击此处继续浏览。
如对集团订阅感兴趣,请联络我们

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

LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link