Meaning
Administrative guidance clarifies the criteria for determining which parties qualify for tax treaty benefits regarding passive income. Notice 2018 No 9 beneficial ownership establishes a set of rules to prevent treaty shopping by offshore entities. The regulation focuses on whether the recipient of dividends and royalties has sufficient control and economic right over the funds.
Status Determination
Tax authorities evaluate the applicant to see if they act simply as a conduit for another party. To satisfy notice 2018 no 9 beneficial ownership, the entity must carry out substantive business activities and possess the power to dispose of the income. An entity that is legally bound to pay more than sixty percent of its income to a resident of a third country within twelve months will likely fail this test.
Recipient Requirement
The recipient must not be a shell company with no employees or office space. Under the standards of notice 2018 no 9 beneficial ownership, the local tax bureau examines the personnel and assets of the offshore claimant. A company that lacks the necessary resources to manage the risks associated with the income-generating assets will be denied treaty benefits.
Treaty Eligibility
Filing for a lower withholding rate requires the submission of a formal application and supporting evidence. Even if notice 2018 no 9 beneficial ownership is established, the taxpayer must still meet other conditions set out in the specific double taxation agreement between China and the home jurisdiction. The final decision rests with the district-level tax office where the Chinese payer is registered.
