Meaning
National tax offices implement an anti-tax avoidance directive to tax the indirect transfer of taxable assets, such as real estate or equity in mainland enterprises, by non-resident companies. This SAT Bulletin 2015 No 7 targets transactions where a non-resident company transfers equity in an offshore holding company that owns onshore assets, effectively bypassing domestic tax. If the transfer lacks reasonable commercial purpose, tax authorities can recharacterize the transaction as a direct transfer and levy tax.
Indirect Transfer
The regulation focuses on the transfer of offshore holding companies that have little to no actual business substance. If the majority of the holding company’s value is derived from onshore assets, the transaction is subject to close scrutiny. Tax authorities evaluate the commercial substance of the offshore entity to determine whether the transaction was structured solely for tax avoidance.
Commercial Purpose
To avoid being taxed under this directive, the parties must prove that the transaction has a reasonable commercial purpose. This assessment considers factors such as the corporate structure, the economic reality of the transaction, and the functions performed by the offshore entities. A transaction that is driven by genuine business needs rather than tax savings is more likely to be accepted by the tax bureau.
In making this evaluation, the tax authorities analyze the asset value, revenues, and personnel allocation of the offshore intermediate holding company to determine its operational validity.
Reporting Duty
Both the buyer and the seller have the option to report the transaction.
