An interesting indirect transfer case was recently reported in Tax Planning, one of the official journals of the SAT. In the Shenyang case, a Cayman seller (company F) transferred a Mauritius subsidiary (company C) to a BVI buyer (company P) on 30 June 2008. Company C held 26.3% of the listed shares of a Shenyang retail company, Listco, listed on the Shenzhen Stock Exchange. Company C, after being acquired by Company P, sold some of the shares of Listco in 2010.
During an investigation against Listco on dividend withholding tax, the Shenyang State Tax Bureau (SSTB) discovered the 2008 indirect transfer and started a Notice 698 investigation.
Company F argued that Notice 698 should not apply because the indirect transfer had reasonable commercial purpose and company C did not abuse the corporate form. Specifically, company F argued that: (1) company C was established in a jurisdiction with a well established legal system that protects group investments; (2) company C had functions that included collecting information and analysing investment projects; and (3) company C assumed the risks in holding Listco’s restricted shares for 30 months before the indirect transfer.
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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