Meaning
Regulatory circular issued by the State Taxation Administration of the People’s Republic of China that governs the reporting obligations for indirect transfers of equity by non-resident enterprises. Under the provisions of bulletin 2010 no 75, foreign companies must disclose transactions that involve the indirect transfer of Chinese taxable assets through intermediate holding companies. The regulation establishes a reporting framework to prevent tax avoidance.
It applies to transactions where the intermediate holding company lacks economic substance.
Administrative Requirement
Reporting obligations fall upon both the transferor and the transferee, as well as the Chinese resident enterprise whose equity is indirectly transferred. The parties must submit the equity transfer agreement, the relationship of the intermediate holding company, and documentation showing the business rationale of the transaction. This submission must go to the local tax bureau with jurisdiction over the Chinese resident enterprise.
Failure to report can lead to penalties for the non-resident entities.
Tax Treatment
Tax authorities analyze the transaction to determine if the intermediate holding company was utilized without reasonable commercial purpose to avoid Chinese corporate income tax. If the tax office decides to disregard the intermediate entity, the transaction is recharacterized as a direct transfer of Chinese equity, and a ten percent withholding tax is levied. This recharacterization relies on factors like the asset structure, the number of employees, and the local tax liability of the intermediate entity.
The assessment must occur within the statutory limitation periods.
Filing Strategy
Foreign multinational corporations operating factories in China must integrate these reporting schedules into their corporate restructuring timelines to avoid sudden tax liabilities. Corporate audit teams work with local tax consultants in jurisdictions like Shanghai or Shenzhen to file the materials within thirty days of signing the transfer agreement. Proper documentation of genuine commercial activity within the intermediate holding company reduces the risk of tax adjustment.
Having this documentation approved by the local tax authorities is necessary before the transaction proceeds.
