Meaning
Regulatory instruments provide the primary legal basis for taxing the indirect transfer of Chinese taxable assets by non-resident enterprises. STA Public Notice 2015 No 7 allows the tax bureau to recharacterize an offshore deal as a direct sale of Chinese property if it lacks a reasonable commercial purpose. This rule targets structures designed to avoid Chinese corporate income tax by selling shares in an intermediary holding company.
Legal Framework
The authority for these measures is derived from the general anti avoidance rule within the Corporate Income Tax Law. Under sta public notice 2015 no 7, the tax office investigates the entire chain of ownership to determine if the offshore entity has any economic substance. Transactions that satisfy specific safe harbor requirements are exempt from this recharacterization.
The investigation looks for evidence that the structure was created for tax benefits.
Taxing Authority
Local tax bureaus in the jurisdiction where the Chinese assets are located hold the power to assess and collect the tax. When sta public notice 2015 no 7 is applied, the offshore seller is treated as having sold the Chinese subsidiary directly, resulting in a ten percent tax on the gains. The bureau can request financial statements and internal memos to verify the intent of the parties.
Administrative Rule
Compliance involves a detailed reporting process where the transferor or transferee submits documents for review. Following the procedures in sta public notice 2015 no 7, the tax office makes a determination on whether to tax the gain. This rule has established a standard for offshore mergers and acquisitions involving Chinese interests.
