On February 3, 2015, the State Administration of Taxation promulgated the Circular on Enterprise Income Taxes on Indirect Transfer of Property by Non-resident Enterprises (hereinafter, the "Circular"), which came into effect on the day of its promulgation.
The Circular specifically stipulates the concept of "property such as equity owned by China's resident enterprises," which means property or real estate of an establishment or place or equity investment assets of China's resident enterprises within China which are directly owned by non-resident enterprises where income generated from their transfer is subject to enterprise income taxes payable in China under China's tax laws (hereinafter, "Taxable Property in China"). Meanwhile, the scope of indirect transfer transactions is expanded from equity transfer to any transfer of real estate and other property in China.
According to the Circular, reasonable commercial objectives should be determined by generally considering eight factors, namely whether the major value in the equity of an offshore enterprise is directly or indirectly derived from any Taxable Income in China; whether the assets of an offshore enterprise consist primarily of direct or indirect investments in China or whether its income is directly or indirectly derived primarily from China; whether the functions performed or risks assumed by affiliated enterprises under the Taxable Property in China directly or indirectly held by offshore enterprises can substantiate the economic substances of an enterprise structure; the duration of the shareholders, business models and relevant enterprise structure of the offshore enterprises,; the status of payable offshore income taxes on indirect transfer of the Taxable Property in China; the substitutability between the indirect investment or indirect transfer of the Taxable Property in China by equity transferors and their direct investment in or direct transfer of the Taxable Property in China; or taxation agreements, arrangements or other factors applicable to income generated from indirect transfer of the Taxable Property in China.
The Circular adopts an approach that combines "voluntary filing and general anti-tax evasion investigation" and changes the compulsory information reporting obligation to voluntary and selective reporting of information by taxpayers or withholding agents, streamlines the steps of information submission and review between enterprises and tax authorities, and specifically provides for subsequent responsibilities to guide taxpayers to work with tax authorities to resolve tax issues.