In February 2015, the State Administration of Taxation (“SAT”) issued Announcement 71 to introduce a new enterprise income tax (“EIT”) regime for offshore indirect transfers of Chinese property by non-resident enterprises (please see our February 2015 legal flash for detailed information on Announcement 7).

Following the issue of Announcement 7, on May 13, 2015, the SAT released Shui Zong Fa [2015] No. 68 (“Circular 68”), providing internal procedural guidelines to be followed by local tax authorities when analyzing this type of transactions and aiming at uniform application and management of the new regime.

The main highlights of Circular 68 are:

1. Department responsible for handling indirect property transfers

Non-resident taxation departments of local tax authorities at all levels are in charge of collecting EIT on indirect Chinese property transfers by non-resident enterprises.

2. The local tax authorities must issue a receipt of acceptance of voluntary report

When a party to an indirect property transfer (or the Chinese resident enterprise being indirectly transferred) voluntarily reports the transfer to the tax authorities, the tax authorities must issue a receipt of acceptance.

The receipt of acceptance can be used by the reporting parties as proof of reporting and date to be able to benefit from the interest markup waiver or the penalty reduction and waiver.

3. Voluntary report of indirect property transfer is welcomed and encouraged

Although Announcement 7 only provides for voluntary reporting, Circular 68 still urges the local tax authorities to guide and encourage the parties to report taxable indirect transfers.

Circular 68 also encourages the local tax authorities to collect information on indirect property transfers through various channels, including the annual EIT declaration, tax assessment, transfer pricing documentation, crossborder related-party payments, equity transfer administration, application of the double taxation treaty, news reports and listed company announcements.

4. Investigation of indirect property transfer should follow a general anti-avoidance investigation

Announcement 7 specifies that investigations of indirect property transfers must be carried out under the General Anti-Avoidance Rule procedures set out under Decree 322 (please see our December 2014 legal flash for detailed information on Decree 32).

Circular 68 also states that the selection and conclusion of an indirect Chinese property transfer case is subject to SAT’s approval, via examination of the report and relevant materials provided by the tax authorities when they suspect a transaction lacks commercial purposes. Upon receiving SAT’s approval, the tax authorities have nine months to verify and assess the information submitted by the taxpayer during the investigation, and they may ask the parties, their advisors and the resident companies involved for further information and documents to determine whether the taxpayer is subject to a tax adjustment. If so, the tax authorities must report a preliminary adjustment proposal with their opinion and reasoning for SAT’s approval to close the case. All open cases are closed when the tax authorities issue a notice, either for conclusion or for preliminary tax adjustment.

Circular 68 also introduces a panel review mechanism for significant cases that includes setting up a panel of at least five members and nominating a SAT coordinator to conduct the review.

5. Consolidation of voluntary report for an indirect transfer involving properties located in two or more provinces or cities

Announcement 7 abolished the practice provided in the former regulation of allowing taxpayers to choose between tax authorities for reporting purposes if the transfer involved at least two Chinese resident enterprises located in different provinces or cities.

Circular 68 reinstated this practice for voluntary reporting purposes (but not for payment purposes). This should be beneficial to both the reporting parties, by saving compliance costs, and to the tax authorities, by making better use of administrative resources.

Circular 68 took effect on the date of issue, i.e., May 13, 2015, and it will be applied to the unsettled offshore equity transfers taking place before that date, including those that have already been submitted to the SAT.

Date of issue: May 13, 2015. Effective date: May 13, 2015.