On February 3, 2015, the State Administration of Taxation (“SAT”) of China issued the long-awaited Indirect Transfer Regulation (i.e., SAT Bulletin No. 7), replacing the well-known Notice 698. The Indirect Transfer Regulation expands the scope of application to cover indirect transfers of : (i) the property of an “establishment or place,” and (ii) real property situated in China, in addition to the indirect transfer of equity interests in Chinese resident enterprises. This expansion is significant because the Regulation could potentially apply to any multinational enterprises (“MNEs”) that indirectly hold any assets in China.
It is a mixed bag in terms of what this Regulation means to MNEs that have to deal with it. The regulation provides some safe harbors, notably the internal reorganization exemption, but also authorizes tax authorities to directly determine, without going through holistic review, the lack of reasonable commercial purpose under certain circumstances. It no longer requires mandatory reporting, but imposes a withholding obligation on offshore buyers, with the intention to collect the same amount of revenue from the buyer if the seller fails to pay its tax.
The Regulation will have significant influence not only on how cross-border M&A deals are negotiated and conducted in China going forward, but also on existing, open tax positions on indirect transfers that have occurred since 2008. Going forward, there will certainly be to-dos and not-to-dos in negotiation and contract drafting for transactions, and in dealing with the tax authorities.
For more information, see the February 2015 Baker & McKenzie China Tax Client Alert, Breaking News: China Issues Long Awaited Indirect Transfer Regulation Replacing Notice 698, also available under publications at www.bakermckenzie.com.