CHINA is requiring that capital gains taxes be paid on some indirect sales of shares in Chinese companies.

The transactions involve sales by foreign sellers of shares in offshore holding companies that own shares in Chinese companies. China said the offshore holding companies lack economic substance and, therefore, the sales should be treated as sales of Chinese company shares directly.

The provincial level office of the State Administration of Taxation in Guangdong released details of two indirect share transfer cases in June. In one, a British Virgin Islands company sold a Hong Kong holding company that owns shares in Guangdong FION Leather Stock Co. Ltd. The second case involved a Hong Kong company selling another intermediate holding company in Hong Kong that also owns shares in FION.

The buyer in both cases was in Hong Kong.

Hong Kong does not impose a tax on capital gains from selling share. The sales prices for the sales were based solely on the value of the shares held in FION.

Another country, India, has also asserted the right to tax foreign sellers on indirect sales of shares in Indian companies. India has been fighting a long-running battle with Vodafone over this issue. (See the May 2012 NewsWire article.)