Shanxi Jincheng case exposes tax risk for non-resident enterprises

The Jincheng State Tax Bureau in Shanxi province recently collected RMB430 million (US$68 million) in income tax on the capital gain from a single offshore indirect transfer, the largest amount for an indirect transfer of a Chinese target by a non-resident enterprise to date.

According to China Taxation News, a newspaper produced by the State Administration of Taxation, the case was complicated in that it involved a complex holding structure and multiple transfers. The tax bureau and the taxpayer had difficult negotiations on key issues, such as how to determine the revenue from the transfer and the taxpayer’s tax base.

The details of the case, such as whether the offshore target company had economic substance and how the value of the underlying Chinese subsidiary was appraised, were not released to the public. Therefore, the case is not a valuable reference for the difficult substantive legal questions, such as what constitutes sufficient economic substance and reasonable commercial purpose, or how to properly value a business as a going concern. However, the case did raise some interesting procedural questions that may have a significant impact on both sellers and buyers in offshore transactions.

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