International Tax Newsletter - February 2015

February 2015

China Tax Newsletter


Consumption Tax Levied on Batteries and Coatings

Starting from 1 February 2015, batteries and coatings are subject to consumption tax at the rate of 4% on production, consigned processing, and importation of batteries and coatings.
 

Extension of the Pre-tax Deduction Policy on Loan Loss Reserve for Financial Enterprises

Pre-tax deduction is allowed for loss reserve accrued by financial enterprises for the three categories of loan assets at the rate of 1%. The validity of this policy will be extended to 31 January 2018.
 

Export Enterprises Are to Be Managed by Classification

Starting from 1 March 2015, export enterprises will be classified into four categories according to their tax payment credit ratings, compliance to the regulations on export refund (exemption), etc. The tax authorities will apply different export management measures on export enterprises of different classifications.
 

New Double Taxation Agreement (DTA) Between China and Swiss Takes Effect

The new DTA signed between China and Swiss on 25 September 2013 is effective as of 15 November 2014 and is applicable to income derived by residents of the two countries on and after 1 January 2015.

Tips from BDO China
Compared to the old DTA, the new DTA features the following changes:

(1) Permanent establishment (PE)
A building site, or construction, assembly, or installation project or supervisory activities in connection therewith, constitute a permanent establishment only if they last more than twelve months instead of six months; for furnishing of services (including consultancy services) by an enterprise through employees, it constitutes a PE if the activities last “for a period or periods aggregating more than 183 days within any twelve-month period” instead of “for a period or periods aggregating more than six months within any twelve-month period”.

(2) Dividends
The taxation limit is 10% of the gross amount of the dividends pursuant to the old DTA; in the new DTA, if the beneficial owner is a company (other than a partnership) which holds directly at least 25% of the capital of the company paying the dividends, the taxation limit is 5%, and it is 10% in all other cases.

(3) Royalties
Pursuant to the old DTA, the taxation limit is 10% of the gross amount of the royalties, and it is changed to 9% in the new DTA.

(4) Capital gains
With regard to capital gains from alienation of shares, pursuant to the old DTA, they are taxable in the State of origin of the gains only when the value of the shares derives mostly from the immovable property in the State of origin; in the new DTA, the circumstance is refined: more than 50% of the value of the shares derives from the immovable property in the State of origin. Moreover, a new circumstance where gains are taxable in the State of origin is added to the new DTA: if the recipient of the gains, at any time during the twelve-month period preceding such alienation, had a participation, directly or indirectly, of at least 25% in the capital of that company.
 

New DTA Between China and France Takes Effect

The new DTA signed between China and France on 26 November 2013 is effective as of 28 December 2014 and is applicable to income derived by residents of the two countries on and after 1 January 2015.

Tips from BDO China
Compare to the old DTA, the new DTA features the following changes:

(1) PE
A building site, or construction, assembly, or installation project or supervisory activities in connection therewith, constitute a permanent establishment only if they last more than twelve months instead of six months; for furnishing of services (including consultancy services) by an enterprise through employees, it constitutes a PE if the activities last “for a period or periods aggregating more than 183 days within any twelve-month period” instead of “for a period or periods aggregating more than six months within any twelve-month period”.

(2) Dividends
The taxation limit is 10% of the gross amount of the dividends pursuant to the old DTA; in the new DTA, if the beneficial owner is a company (other than a partnership) which holds directly at least 25% of the capital of the company paying the dividends, the taxation limit is 5%, and it is 10% in all other cases.

(3) Capital gains
The new DTA further specifies the circumstances where the capital gains are taxable in the State of origin, including: alienation of companies whose main properties are immovable properties within 36 months preceding the transfer; for alienation of a company other than the preceding, the transferor shall have a participation, directly or indirectly, of at least 25% in the capital of that company within 12 months preceding the transfer.

Gains from the alienation of any property, other than that referred to in this article, “shall be taxable in the State where the transferor is a resident” instead of “can be taxable in the State of origin”.
 

Further Regulations on Enterprise Income Tax on Indirect Transfer of the Property of Chinese Resident Enterprises by Non-resident Enterprises

Guo Shui Han [2009] No. 698 (hereinafter referred to as “Circular 698”) is a previously issued circular focusing on enterprise income tax on indirect equity transfer of Chinese resident enterprises by non-resident enterprises. Recently, the State Administration of Taxation (SAT) issued the Announcement of the State Administration of Taxation [2015] No. 7 (hereinafter referred to as “Announcement 7”), in which further regulations have been put forward regarding the indirect transfer of equity by non-resident enterprises. Compared to Circular 698, Announcement 7 features the following changes:

(1) More explicit criteria for determining transfers with “reasonable business purposes”;

(2) Explicit conditions for being regarded as transfers with reasonable business purposes;

(3) Explicit conditions for not being regarded as transfers with reasonable business purposes;

(4) Explicit circumstances under which recharacterization of an equity transfer is not required (i.e. there is no need to pay enterprise income tax according to this circular);

(5) Revised regulations on the collection and administration procedures;

(6) More explicit regulations on the legal liability of the transferor and the transferee.

Tips from BDO China
(1) Where both the transferor and the transferee engaged in an indirect equity transfer are non-resident enterprises and the capital gains are subject to the enterprise income tax pursuant to related regulations, the party directly paying the proceeds shall act as the withholding agent for declaring and paying the enterprise income tax.

(2) Parties involved in an indirect transfer of Chinese taxable property can choose to voluntarily report the transaction and submit related documents to their competent tax authorities. However, if the transaction is taxable in terms of Chinese enterprise income tax, the legal liabilities will be different subject to whether related documents have been submitted to the tax authorities:

For the equity transferor who has overdue tax payment, if the transaction has not been reported and related documents have not been submitted to the tax authorities, the late payment interest will be levied based on the RMB loan benchmark interest rate for the tax payment period plus five percentage points; if the transferor has reported the transaction and submitted related documents to the competent tax authority, the late payment interest will be levied based on the RMB loan benchmark interest rate.

If the withholding agent has not reported and submitted related documents to the tax authorities, a penalty ranging from 50% to three times of the tax amount not withheld will be levied on the withholding agent; if the transaction has been reported and related documents have been submitted, the liability of the withholding agent may be mitigated or exempted.