Certain Chinese-controlled companies incorporated in foreign jurisdictions (Overseas Chinese Companies) may be determined to be Chinese resident enterprises for enterprise income tax purposes if they are effectively managed and controlled in China, according to a circular issued by the PRC State Administration of Taxation (SAT) on April 22, 2009. The circular is entitled the Circular on Relevant Issues Concerning the Determination of Resident Enterprises Based on Actual Management Structure Criteria of Chinese-Controlled Enterprises Registered Overseas.
The Circular defines an Overseas Chinese Company to be an enterprise that is incorporated under the laws of a foreign jurisdiction and primarily controlled by a domestic Chinese enterprise or enterprise group as a shareholder. According to this definition, the Circular does not apply to foreign-incorporated enterprises that are controlled by Chinese natural persons or foreign-incorporated companies. However, it is hard to predict how the Chinese authorities will parse this definition in practice.
The Circular provides that an Overseas Chinese Company will be treated as a Chinese tax resident and its global income will be subject to the Enterprise Income Tax Law that took effect on January 1, 2008 if all of the following conditions are met:
- the senior management members in charge of the Overseas Chinese Company’s daily operations and the locations in which they perform their duties are primarily in China;
- the Overseas Chinese Company’s financial and human resource decisions are made or approved by entities or personnel located in China;
- the Overseas Chinese Company’s primary assets, accounting records, corporate seals, and board and shareholder meeting minutes or files are located or kept in China; and
- 50 percent or more of the voting directors or senior management members regularly reside in China.
According to the Circular, once an Overseas Chinese Company is deemed a Chinese tax resident, dividends distributed to it by other Chinese tax residents qualify as exempted income. However, investors in an Overseas Chinese Company must pay taxes on dividends they receive from the company. If an Overseas Chinese Company invests in an enterprise within China, the latter remains a foreign-invested enterprise with respect to taxation. If an Overseas Chinese Company has dual-resident status for tax purposes, the relevant tax treaty or arrangement between China and the other country (or region) will apply.
The Circular applies retroactively from January 1, 2008, and therefore impacts not only Overseas Chinese Companies’ future operations, but also their financial reports from 2008.