On 8 July 2014, the SAT issued Shui Zong Han  No. 318 (“Notice 318”) to strengthen collection and administration of the enterprise income tax (“EIT”) on equity transfers.
Under Notice 318, the tax authorities are more likely to scrutinize the following transactions:
equity investments through asset transfer;
dividend distributions on income derived from equity investments held for less than 12 months;
intragroup equity transfers without consideration;
equity transfers at relatively low prices; and
equity transfers to recipients in low-tax jurisdictions.
According to Notice 318, the tax authorities will be empowered to make reasonable adjustments if these transactions result in a loss of tax
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revenue. However, in accordance with the PRC Enterprise Income Tax Law, the tax authorities can only make an adjustment if the transaction lacks a reasonable commercial purpose.
Notice 318 also aims to improve the tax authorities information collection practices by instructing them on the collection of information from both internal and external sources. For internal information collection, the tax authorities are instructed to: (i) review annual EIT returns for equity transfer information; (ii) obtain information about equity transfer agreements, equity transfer pricing, taxpayers’ contact information, etc. during the change of tax registration; and (iii) establish communication and coordination mechanisms between state and local tax authorities and between the competent tax authorities over equity transferors and transferees. For external information collection, the tax authorities are instructed to obtain equity transfer information from sources such as business registration and administration departments, announcements made by listed companies, property rights exchange websites, and financial news reports