In October 2009, the State Administration of Taxation of China for the first time formally issued a circular providing guidance on the relevant factors for determining whether or not a recipient of income is considered to be the beneficial owner ("Circular 601"). However, uncertainty remained in certain aspects. This is why the State Administration of Taxation of China issued an announcement on 29 June 2012 providing further clarification on China's interpretation of the concept of beneficial ownership (the "Announcement").
Beneficial ownership is an important concept in international tax law and especially for the application of double taxation agreements ("DTAs"). Most DTAs provide that a recipient of an income item is only entitled to an exemption from or reduction of (withholding) taxes on that income item if the recipient is the beneficial owner of that income item. As the term 'beneficial owner(ship)' is not defined in most DTAs, many countries, including China, interpret the term under their domestic (tax) law.
One of the most important features of the Announcement is the safe harbour provision on treaty qualification for listed companies and their subsidiaries. This provision prescribes that the beneficial owner status of a company resident in a treaty country that derives dividend income from China can be confirmed without further verification if that company is:
- listed on a stock exchange in that treaty country, or
- 100% controlled by a company that is listed on a stock exchange and tax resident in the same treaty country.
Because the safe harbour provision requires a listed company and its fully controlled subsidiaries to be resident of the same country, it will not provide any certainty in respect of the beneficial owner status to structures in which a foreign listed company invests in China through a third-state holding company.
Furthermore, the Announcement stresses the importance of the reliance on all relevant documents for the Chinese tax authorities in making such an analysis. Therefore, it is advisable that foreign investors that derive income items from China keep all documents that may be relevant in order to benefit from their beneficial owner status under Chinese DTAs. These documents include financial statements, records of cash movement, board meeting minutes, relevant contracts, and certificates or documents that can substantiate the ownership of certain assets.