China Clarifies and Expands Reporting Obligations of Foreign Enterprises on Indirect Equity Transfers

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On March 28, 2011, China’s State Administration of Taxation (“SAT”) issued Announcement No. 24 regarding Several Problems of Regulation on Income Tax of Non-resident Enterprises (the “Announcement”), effective beginning April 1, 2011. The Announcement applies to all outstanding tax liabilities incurred but not paid before April 1, 2011.

General Introduction

The Announcement clarified the tax reporting obligations of non-resident enterprises to make payments related to interest, leasing fees, guarantee expenses, property rentals, equity investments and transfers originating from China. More importantly, the Announcement contains interpretations of Guo Shui Han [2009] No. 698 relating to Regulations on Enhancement of Income Tax of Non-resident Enterprises (“Circular 698”) which requires, among other things, all foreign enterprises to report their gains from any indirect transfers of Chinese-resident enterprises to the applicable Chinese tax authorities.

Key Points

Circular 698 requires foreign enterprises involved in any indirect transfers of equity of a Chinese-resident enterprise (an “Indirect Transfer”) to provide relevant transaction materials to an applicable Chinese tax authority if (i) the tax rate imposed by the country (region) where the overseas holding company was established is less than 12.5%, or (ii) the aforesaid country (region) does not levy income tax on income of its residents.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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