Circular Number Issuance Date Effective Date Topic What is new? Caishui  No. 84 2017-12- 28 2017-01- 01 Foreign tax credit policies for outbound investment This Circular is a supplementary regulation to the existing foreign tax credit (“FTC”) policies for overseas incomes outlined in the PRC Corporate Income Tax (“CIT”) Law and the circular Caishui  No. 125 (“Circular 125”). 1. According to the Circular, an enterprise may choose either to separately calculate its overseas taxable incomes by jurisdiction, or to calculate its overseas taxable incomes from all non-PRC jurisdictions aggregately. The enterprise shall respectively calculate the creditable tax amount as well as the FTC limit based on the method stipulated in Circular 125. The calculation method for overseas taxable incomes cannot be changed within 5 years once determined. 2. If the enterprise changes its calculation method for overseas taxable incomes, the unutilized creditable tax amount during the previous years can be carried forward for credit, subject to the FTC limit calculated under the new calculation method, before such creditable amount expires. 3. The Circular stipulates that the dividend distributed by the overseas subsidiaries within 5 tiers (vis-à-vis 3 tiers under the old policies), in which the PRC enterprise directly or indirectly holds no less than 20% equity interest, can be subject to FTC policy. SAT Announcement  No.9 2018-02- 03 2018-04- 01 Interpretation of “beneficial owner” in bilateral double taxation treaties This Announcement, superseding the circular Guoshuihan  No. 601 (“Circular 601”) and SAT Announcement  No. 30 (“Announcement 30”), serves as the latest regulation to address the concept of “beneficial owner” which can enjoy treaty benefits for dividend, interest and royalty incomes under the relevant bilateral double taxation treaties. Main changes reflected in the Announcement are as follows: 1. Amendments to the negative factors for comprehensive assessment of beneficial owner Below are the negative factors for beneficial owner assessment under the Announcement: a) The applicant is obliged to pay over 50% of the relevant incomes received from China to a party that is a tax resident of a third jurisdiction within 12 months upon receiving the dividend. “Obliged to pay” refers to the situation where the applicant has a contractual obligation to pay, or where the applicant has actually made the payments even though it has no contractual obligation to pay. [Key changes]: Compared with the interpretation in Circular 601, the time period in the Announcement is now fixed at 12 months, while the percentage of redistribution is reduced from 60% to 50%. Besides, the Announcement includes detailed interpretation regarding the concept of “obliged to pay”. b) The applicant’s business activities are not substantive operating activities. Typical substantive operating activities shall include manufacturing, trading, management, etc. Functions and risks of the applicant should be analyzed for the substance test. It is noteworthy that under the Announcement, pure investment management function could also be considered as substantive operational activities. For the applicant that is engaged in investment management activities which are not recognized as substantive operating activities but also engaged in other operational activities at the same time, as long as the other operational activities are not considered to be significant, the applicant shall not be regarded to be engaged in substantive operating activities. [Key changes]: Compared with the interpretation in Circular 601, the Announcement makes it clear that investment management activities could also be regarded as having business substance. Besides, examples are given in the Announcement for assessing the business substance of the applicant. c) The applicant is located in a jurisdiction where income tax is not levied for the relevant income or the actual income tax rate is significantly low. [Key changes]: No changes. This criterion is fully consistent with the interpretation in Circular 601. d) Apart from the loan agreement under which the interest income arises, the creditor has concluded other loan agreements with third parties with similar terms regarding loan amount, interest rate and signing date, etc. [Key changes]: No changes. This criterion is fully consistent with the interpretation in Circular 601. e) Apart from the agreement on transfer of use right of copy rights, patents, technologies, etc., under which the royalty income arises, the licensor has concluded other royalty agreements with third parties for transfer of use right or ownership of similar copy rights, patents or technologies. [Key changes]: No changes. This criterion is fully consistent with the interpretation in Circular 601. 2. Expansion of the scope of “safe harbour rule” Announcement 30 introduced a safe harbour rule for listed companies of the other contracting state deriving dividend income from China and such companies can be directly regarded as beneficial owner without assessment. The scope of the safe harbour rule is further expanded in the Announcement. According to the Announcement, the applicant shall be directly regarded as “beneficial owner”, if any one of below situations applies: a) the applicant is the government of the other contracting state; b) the applicant is the tax resident company, as well as a listed company of the other contracting state; c) the applicant is a tax resident individual of the other contracting state; or d) the applicant is 100% held (or 100% jointly held) by the government, tax resident individuals, listed tax resident companies of the other contracting state. If any intermediate holding companies are involved, the intermediate companies shall be either PRC tax resident companies or tax resident companies of the other contracting state. The Announcement clarifies that the criteria of shareholding percentage mentioned above shall be met at all times during 12 consecutive months before the dividend is received. 3. Introduction of the rules for assessment of the applicant’s 100% shareholder, which may qualify the applicant as beneficial owner. According to Circular 601 and Announcement 30, if the applicant neither falls into the scope of safe harbour nor qualifies as beneficial owner after a comprehensive assessment, the applicant shall not be able to enjoy treaty benefit for relevant incomes derived from China. According to the Announcement, however, under the situation above, there could still be chances that the applicant might be regarded as beneficial owner, if the shareholder which directly or indirectly holds 100% equity interest in the applicant meets either of the following conditions: a) The shareholder qualifies as the beneficial owner after comprehensive assessment, and the applicant and the shareholder are tax residents of the same jurisdiction; or b) The shareholder qualifies as the beneficial owner after comprehensive assessment and the applicant and the shareholder are tax residents of different jurisdictions. However, the shareholder and the intermediate holding companies are all tax residents of the jurisdictions that have signed bilateral double taxation treaties (“DTTs”) with China. According to the relevant DTTs, the shareholder and the intermediate holding companies shall all enjoy at least the same, if not more preferential, treaty benefits for dividend incomes derived from China, than those enjoyed by the applicant. 4. Others a) With regard to administrative procedures, the Announcement endorses the treaty benefit reporting procedures and documentation required under SAT Announcement  No. 60. Besides, the Announcement clarifies that the tax resident certificates submitted to the tax authority should be for the current year or for one year prior to the year during which the relevant income is received. b) The Announcement clarifies that even if the applicant qualifies for beneficial owner status, the tax authority can still deny its application for treaty benefit based on the main purpose test introduced in the DTTs and the General Anti-Avoidance Rules (“GAAR”). c) The Announcement further makes clear the concept of an “agent”, which was originally mentioned in Announcement 30, by excluding the following items from the “income received on behalf” of an agent: (1) Dividends received by shareholders based on shares held; (2) Interest received by creditors based on credit rights; (3) Royalty fees received by licensors based on the licenses granted SAT Announcement  No. 11 2018-02- 09 2018-04- 01 Updates on interpretation of tax treaty provisions The Announcement has updated relevant parts of the tax treaty interpretations in the existing circular Guoshui  No. 75 (“Circular 75”). Key updates brought by the Announcementis as follows: 1. Updates on articles regarding permanent establishment (“PE”) a) The Announcement clarifies that Sino-foreign cooperative educational institutions shall constitute PEs in China; b) For provisions relating to service PEs, “during any consecutive 6-month period” shall be interpreted as “during any consecutive 183- day period”. 2. Updates on articles regarding marine and air transportation The Announcement has entirely repealed Article 8 of Circular 75 regarding marine and air transportation by amending and clarifying the scope of cross-border transportation business as well as the scope of relevant incomes. Especially, it clarifies that the incomes derived from “time charter”, “voyage charter” and other types of lease of ships or aircrafts equipped with facilities, human resources and supplies as well as the interest incomes and minor lease incomes as auxiliary incomes of the international transportation services shall be covered by the international transportation under the taxation treaties. 3. Updates on articles regarding artists and athletes The Announcement has entirely repealed Article 17 of Circular 75 regarding artists and athletes by amending the scope of artists’ and athletes’ activities as well as including detailed guidelines on how to implement the rules under different situations. Especially, the interpretation emphasizes that the contracting state in which the artists or athletes, as tax residents of the other contracting state, undertake personal events has the taxation right on the incomes derived, regardless whether the artists or athletes themselves receive the incomes directly or other parties receive the incomes from the events. 4. Clarification on whether and how the double taxation treaties shall apply to partnerships It is the first time that the Announcement sheds light upon whether and how the double taxation treaties shall apply to partnerships: a) For partnership established under the PRC laws and regulations, if the partner of the partnership is a tax resident of the other contracting state, the relevant treaty benefits shall apply; b) For partnership established under foreign laws and regulations with effective management located outside China, if it has establishment or place of business within China or it derives incomes from China without having establishment or place of business in China, the partnership shall be regarded as a nonPRC tax resident. For such partnership, treaty benefits shall apply only if the partnership is the tax resident of the other contracting state, unless otherwise stipulated in the relevant double taxation treaty.