Meaning
Tax rule targets transactions where a foreign company sells a holding company that owns Chinese assets to avoid local capital gains tax. This state taxation administration announcement 7 allows the tax bureau to look through the offshore structure to the real assets in the territory. It applies if the offshore entity has no reasonable commercial purpose other than tax avoidance.
Indirect Transaction
Selling shares in a Hong Kong or Cayman Islands firm that owns a local factory is a common example. Under state taxation administration announcement 7, the seller must report the deal to the local tax office if the assets are primarily located within the country. This ensures that the profit from the local assets is taxed where they sit.
Commercial Substance
Authorities look for physical offices, employees and active business operations in the offshore holding company. If these are missing, the state taxation administration announcement 7 rules deem the transaction as a direct sale of the Chinese assets. This test is the primary way the government determines the tax liability.
Reporting Penalty
Both the buyer and the seller have a duty to report the transaction. Failure to comply with state taxation administration announcement 7 can lead to the buyer being held liable for the seller’s unpaid taxes. This shared risk encourages both parties to follow the reporting rules.
