Tax on corporate transactions in China: overview

A Q&A guide to tax on corporate transactions in China.

The Q&A gives a high level overview of tax in China and looks at key practical issues including, for example: the main taxes, reliefs and structures used in share and asset sales, dividends, mergers, joint ventures, reorganisations, share buybacks, private equity deals and restructuring and insolvency.

To compare answers across multiple jurisdictions, visit the Tax on corporate transactions Country Q&A tool.

The Q&A is part of the Multi-jurisdictional Guide to Tax on Transactions. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-mjg.

Tony Dong and Alice Zhang, King & Wood Mallesons
Contents

Tax authorities

1. What are the main authorities responsible for enforcing taxes on corporate transactions in your jurisdiction?

The State Administration of Taxation (SAT) is the highest tax authority in China, and it interprets tax laws and regulations by producing Circulars, Notices, Replies and Rulings, and provides guidance or approves special tax treatment for specific transactions. The SAT does not normally deal with taxpayers directly.

China has a dual tax system for tax enforcement:

  • There is a parallel structure of state tax authority and local tax authority in place in each local administration (including each province, municipality, city, county, and so on)

  • These two tax authorities are responsible for the administration and collection of different types of taxes on corporate transactions.

 

Pre-completion clearances and guidance

2. Is it possible to apply for tax clearances or obtain guidance from the tax authorities before completing a corporate transaction?

There are no explicit laws or regulations providing formal procedures for applications for tax clearances or guidance from the tax authorities before completing a corporate transaction.

In practice, it is difficult to obtain a formal tax confirmation document from the tax authority before a corporate transaction takes place. It is usually possible to consult with the tax authority in charge to ascertain the tax treatment of a specific transaction. However, any feedback received from the tax authority will not usually be in writing, and is not usually legally binding.

However, it is possible to enter into advance pricing agreements (APAs) with the State Administration of Taxation for transfer pricing purposes. Every APA must set out its implementation period, and the APA will be effective and legally binding during that prescribed implementation period.

 

Main taxes on corporate transactions

Transfer taxes and notaries' fees

3. What are the main transfer taxes and/or notaries' fees potentially payable on corporate transactions?

Stamp duty (SD)

Stamp duty (SD) is imposed on certain documents executed or used in China. Each party to the document must pay SD, and the tax rate varies depending on the type of document being used, for example:

  • For purchase and sales contracts, the SD is 0.03% of the entire purchase and sale amount in the document.

  • For loan agreements, the SD is 0.005% of the loan amount.

  • For leasing agreements, the SD is 0.01% of the rent.

  • For transfer of equity/shares agreements, the SD is 0.05% of the contract value.

 

Corporate and capital gains taxes

4. What are the main corporate and/or capital gains taxes potentially payable on corporate transactions?

Enterprise income tax (EIT)

China resident enterprises are subject to enterprise income tax (EIT) on their worldwide income. Capital gains received by the enterprise will also form part of its taxable income and be liable to EIT if the enterprise is profitable. The statutory EIT rate is 25% in China. Favourable tax treatment may be available under certain circumstances.

A non-resident enterprise without a permanent establishment in China, or a non-resident enterprise with a permanent establishment in China whose income is not effectively connected with that permanent establishment, will be subject to EIT on a withholding basis on China-sourced income (including capital gains, royalties, interests, and so on). The EIT is charged at a rate of 10% and is imposed on China-sourced income, though reductions or exemptions from EIT may be available under any applicable double tax treaties.

A non-resident enterprise with a permanent establishment in China which receives income in connection with that permanent establishment will be subject to EIT. In general, relevant costs and expenses incurred by the permanent establishment can be deducted from gross revenue for EIT purposes. Where a double tax treaty is applicable, business profits can only be taxed if the non-resident enterprise carries on business in China through a permanent establishment in China and the business profits are attributable to that permanent establishment.

 

Value added and sales taxes

5. What are the main value added and/or sales taxes potentially payable on corporate transactions?

Value-added tax (VAT)

Key characteristics. Value-added tax (VAT) is imposed on:

  • The sale of goods.

  • The provision of processing, repair and replacement services.

  • The importation of goods.

In addition, China is currently undertaking a reform of its VAT legislation, and certain types of income which used to pay business tax will now be subject to VAT. This reform has been implemented on a pilot basis in certain provinces and municipalities, and takes effect nationwide from 1 August 2013.

Under the VAT regime, the taxpayer is classified into either a general taxpayer or a small-scale taxpayer. For a general taxpayer, VAT is assessed based on the credit mechanism where the input VAT can be credited against the output VAT for the purpose of calculating the VAT payable in a taxable period. For a small-scale taxpayer, VAT is calculated based on the rental income (exclusive of VAT), and no credit mechanism is available.

Triggering event. The tax is triggered when the activity triggering the tax occurs.

Liable party/parties. The provider of the goods or services that are subject to VAT will pay VAT.

Applicable rate(s). The applicable VAT rate differs depending on the status of the taxpayer. For a general taxpayer, the standard VAT rates are 17%, 11% and 6% (depending on the types of activities that are subject to VAT). For a small-scale taxpayer, the VAT rate is 3%. Certain VAT reductions, exemptions or refunds are available under the prescribed circumstances.

Business tax (BT)

Key characteristics. Business tax (BT) is levied on:

  • The provision of services.

  • The transfer of intangible assets.

  • The sale of real property in China.

China is currently undertaking VAT reform with the result that certain types of income which used to pay BT are now subject to VAT.

Triggering event. The tax is triggered when the activity triggering the tax occurs.

Liable party/parties. The provider of the services, the transferor of the intangible assets or the seller of real property in China pays BT.

Applicable rate(s). BT rates range from 3% to 20%, with most services taxed at 5%. Further, exemptions from BT are available (for example, where intangible assets or real property are transferred to a company as a capital contribution by the investors, this is exempt from BT).

 

Other taxes on corporate transactions

6. Are any other taxes potentially payable on corporate transactions?

Land value-added tax (LVAT)

Key characteristics. Land value-added tax (LVAT) is imposed on gains made from real property transactions.

Triggering event. The tax is triggered by the sale or transfer of real estate.

Liable party/parties. The transferor must pay the LVAT.

Applicable rate(s). LVAT is applied at four progressive rates, depending on the amount of the gain made as against the "deductible items" for that gain ("deductible items" are the amounts that can be deducted against the gain made, and generally represent the costs related to the transaction):

  • Where the gain made represents an amount not exceeding 50% of the sum of the deductible items, the tax rate is 30%.

  • Where the gain made represents an amount exceeding 50%, but not exceeding 100%, of the sum of the deductible items, the tax rate is 40%.

  • Where the gain made represents an amount exceeding 100%, but not exceeding 200%, of the sum of the deductible items, the tax rate is 50%.

  • Where the gain made represents an amount exceeding 200% of the sum of the deductible items, the tax rate is 60%.

Deed tax (DT)

Key characteristics. Deed tax (DT) is levied on the transfer of land use rights or real property.

Triggering event. The tax is triggered when the land use right or the real property is transferred.

Liable party/parties. The transferee is liable to pay the DT.

Applicable rate(s). DT rates range from 3% to 5%. The specific applicable rates are determined by the provincial government. DT exemptions and reductions can be granted under certain circumstances.

 

Taxes applicable to foreign companies

7. In what circumstances will the taxes identified in Questions 3 to 6 be applicable to foreign companies (in other words, what "presence" is required to give rise to tax liability)?

Stamp duty (SD)

Foreign companies will be subject to stamp duty (SD) if those foreign companies either:

  • Execute taxable documents in China.

  • Execute taxable documents outside of China that are intended to be used in China.

Enterprise income tax (EIT)

A foreign company without a permanent establishment in China, or a foreign company with a permanent establishment in China whose income is not effectively connected with that permanent establishment, will be subject to EIT on a withholding basis on China-sourced income (including capital gains, royalties, interests, and so on). The EIT is charged at a rate of 10% and is imposed on China-sourced income, though reductions or exemptions from EIT may be available under any applicable double tax treaties.

A foreign company with a permanent establishment in China which receives income in connection with that permanent establishment will be subject to EIT. In general, relevant costs and expenses incurred by the permanent establishment can be deducted from gross revenue for EIT purposes. Where a double tax treaty is applicable, business profits can only be taxed if the foreign company carries on business in China through a permanent establishment (PE) in China and the business profits are attributable to that PE.

A foreign company may be regarded as a China tax resident if its place of effective management is in China. In that case, the foreign company, being a China tax resident, will be subject to EIT on its worldwide income.

Value-added tax (VAT)

A foreign company may be subject to VAT where the recipient of a service that is subject to VAT is a Chinese resident.

Business tax (BT)

A foreign company will be subject to business tax where either:

  • The recipient of a service that is subject to business tax, which is provided by the foreign company, is a Chinese resident.

  • The foreign company transfers or leases land situated in China.

Land value-added tax (LVAT)

Foreign companies will be subject to land value-added tax if they transfer real property situated in China.

Deed tax (DT)

Foreign companies will be subject to deed tax if they acquire real property situated in China.

 

Dividends

8. Is there a requirement to withhold tax on dividends or other distributions?

A dividend distribution between two Chinese resident companies is exempt from EIT provided the following conditions are met:

  • The dividends received by a China tax resident enterprise must be derived from its direct investment in another China tax resident enterprise.

  • The tax exempt dividends do not include the dividends of the publicly listed shares of a resident enterprise that are held for less than 12 consecutive months.

If the dividends are paid to a foreign company, then the China tax resident enterprise must withhold tax before remitting dividends abroad. The withholding tax rate is usually 10% and a reduction/exemption may be available under any applicable double tax treaty.

If the dividends are paid to individual shareholders, then individual income tax at a rate of 20% must also be withheld.

 

Share acquisitions and disposals

Taxes potentially payable

9. What taxes are potentially payable on a share acquisition/share disposal?

Enterprise income tax (EIT)

Capital gains derived from a share disposal may be subject to enterprise income tax for the transferor (see Question 4).

Stamp duty (SD)

Each party to a share transfer agreement is subject to stamp duty (see Question 3).

 

Exemptions and reliefs

10. Are any exemptions or reliefs available to the liable party?

Under the relevant PRC tax regulations, where a company is involved in a reorganisation, a share disposal transaction can choose to apply for a deferral of enterprise income tax provided the following criteria can be satisfied:

  • The share disposal has a reasonable business purpose.

  • No less than 75% of the shares of the target company have been acquired under the reorganisation.

  • No less than 85% of the total consideration paid in the share disposal has been paid in the form of shares (that is, the shares of the acquirer company or its controlling company).

  • The substantial operating activities of the target company remain in place for 12 consecutive months after the reorganisation.

  • The original shareholders who have been paid in the form of shares cannot transfer those shares within 12 consecutive months after the reorganisation.

Under the tax deferral treatment:

  • The seller company can defer the recognition of capital gains on the sale of shares of the target company.

  • The buyer company can defer the recognition of capital gains on the transfer of shares being paid as consideration.

  • The seller obtains the carryover tax basis of the shares being paid as consideration.

  • The buyer obtains the carryover tax basis of the shares of the target company.

 

Tax advantages/disadvantages for the buyer

11. Please set out the tax advantages and disadvantages of a share acquisition for the buyer.

Advantages

The following advantages apply:

  • Stamp duties may be reduced.

  • The operating loss of the target company remains available to offset its taxable income in the future.

Disadvantages

The following disadvantages apply:

  • In a share acquisition, the buyer acquires the company inclusive of all its assets, liabilities and workforce. As such, the buyer can potentially assume hidden or unknown risks and liabilities.

  • The buyer cannot obtain the stepped-up basis of the assets of the target company, and so the target company cannot depreciate the stepped-up value of the assets to offset its operating income.

  • Detailed and extensive due diligence must be done in order to identify the hidden risks and liabilities of the target company before making the acquisition.

 

Tax advantages/disadvantages for the seller

12. Please set out the tax advantages and disadvantages of a share disposal for the seller.

Advantages

A share acquisition involves exposure to only limited types of taxes, with those generally being only enterprise income tax and stamp duty. Therefore, business tax, value-added tax and land value-added tax can be avoided.

Disadvantages

Given that the buyer acquires the company inclusive of all liabilities and risks, the seller may be required to give comprehensive warranties and indemnities so as to protect the buyer against potential liabilities and risks.

A detailed disclosure process may be necessary in order to limit the seller's liabilities under any warranties given by excluding those matters which have been disclosed to the buyer.

 

Transaction structures to minimise the tax burden

13. What transaction structures (if any) are commonly used to minimise the tax burden?

A special share transfer can be used to defer the recognition of enterprise income tax (EIT). Under the relevant PRC tax regulations, a share acquisition/disposal may be elected for a special share transfer and be given a deferral of EIT provided it meets certain conditions (see Question 10).

 

Asset acquisitions and disposals

Taxes potentially payable

14. What taxes are potentially payable on an asset acquisition/asset disposal?

Enterprise income tax (EIT)

Gains derived from an asset disposal will be subject to enterprise income tax (see Question 4).

Business tax (BT)

Transfers of land, real property and intangible assets will be subject to business tax (see Question 5).

VAT

The sale of goods will be subject to VAT (see Question 5).

Land value-added tax (LVAT)

The transferor of real property will be subject to LVAT for the gains realised from the transfer (see Question 6).

Deed tax (DT)

The transferee of real property will be subject to deed tax (see Question 6).

Stamp duty (SD)

Each party to an asset transfer agreement will be subject to stamp duty (see Question 3).

 

Exemptions and reliefs

15. Are any exemptions or reliefs available to the liable party?

Asset disposals can also be subject to the benefit of a deferral of enterprise income tax as that applicable to share disposals where there is a company reorganisation (see Question 10). Under the relevant PRC tax regulations, an asset disposal transaction can apply for the deferral of enterprise income tax where the following criteria are satisfied:

  • The asset disposal has a reasonable business purpose.

  • No less than 75% of the assets of the target company have been acquired under the reorganisation.

  • No less than 85% of the total consideration paid in the reorganisation has been paid in the form of shares (that is, the shares of the acquirer company or its controlling company).

  • The substantial operating activities of the target company remain in place within the 12 consecutive months after the reorganisation.

  • The original shareholders who have been paid in the form of shares cannot transfer those shares within 12 consecutive months after the reorganisation.

Under the tax deferral treatment:

  • The seller can defer the recognition of capital gains derived from the sale of assets.

  • The seller obtains the carryover tax base on the shares being paid as consideration.

  • The buyer obtains the carryover tax base on the assets being acquired.

In addition, a transfer of used fixed assets can be subject to reduced VAT, provided the following circumstances apply:

  • For self-used fixed assets that were purchased or self-made prior to 31 December 2008, the VAT rate is 2%.

  • For a sale of self-used fixed assets by small-scale taxpayers, the VAT rate is 2%.

  • For a sale of self-used goods other than fixed assets by small-scale taxpayers, the VAT rate is 3%.

Where the seller company conducts an entire business transfer (that is, transfers all the assets, liabilities and employees to the buyer), that entire business transfer will not be subject to business tax or VAT.

 

Tax advantages/disadvantages for the buyer

16. Please set out the tax advantages and disadvantages of an asset acquisition for the buyer.

Advantages

The following advantages apply:

  • The buyer may obtain a stepped-up basis on the assets being acquired, and therefore the buyer can depreciate the stepped-up asset to offset the operating income.

  • Since a change of the shareholding of a Chinese company can be subject to government approval, it is less complicated to acquire the assets than to acquire the shares.

  • A pure acquisition of assets is more likely to avoid hidden risks and liabilities than the acquisition of shares (although risks such as liens can sometimes be attached to the assets).

  • Due diligence is relatively easier in an asset acquisition than in a share acquisition, since most liabilities remain with the seller.

Disadvantages

The following disadvantages apply:

  • The acquisition of critical business contracts may be subject to the consents of the parties to the business contracts.

  • Burdensome registration formalities will be required for a change of ownership in real property, motor vehicles, and so on.

  • Deed tax will be incurred for the buyer in an acquisition of real property.

 

Tax advantages/disadvantages for the seller

17. Please set out the tax advantages and disadvantages of an asset disposal for the seller.

Advantages

The following advantages apply:

  • The seller may still retain the shareholding of the target company excluding the assets being transferred out.

  • An asset disposal can avoid potential refusals of consent from minority shareholders.

Disadvantages

The following disadvantages apply:

  • An asset transfer which is followed by a subsequent liquidation can result in the seller incurring double taxation:

    • first, the seller will be subject to enterprise income tax on the capital gains derived from the sale of assets;

    • second, on liquidation, the seller's shareholders will be subject to income tax on any distributions distributed by the liquidated company.

  • An asset transfer is likely to result in more tax liabilities for the seller, for example, value-added tax in a sale of goods, business tax in a sale of intangible assets or real property, land value-added tax in a sale of real property, and so on.

  • The seller will be liable for any outstanding debts after the assets have been sold.

 

Transaction structures to minimise the tax burden

18. What transaction structures (if any) are commonly used to minimise the tax burden?

A special asset transfer can be used to defer the recognition of enterprise income tax (EIT). Under the relevant PRC tax regulations, an asset disposal can be elected for a special asset transfer and have enterprise income tax deferred where there is a reorganisation and certain conditions are met (see Question 15).

 

Legal mergers

Taxes potentially payable

19. What taxes are potentially payable on a legal merger?

Enterprise income tax (EIT)

A merger can take the form of a merger by absorption or consolidation. A merger may involve the transfer of shares or assets or both, and therefore capital gains derived from an asset disposal or share disposal will be subject to enterprise income tax (see Question 4).

Business tax (BT)

A merger can involve the transfer of land, real property and intangible assets which will all be subject to business tax. However, if the company to be merged transfers its entire business (including all the assets, liabilities and workforce), then that transfer of the entire business will not be subject to business tax.

Value-added tax (VAT)

A merger can involve the sale of goods which will be subject to VAT. However, if the company to be merged transfers its entire business (including all the assets, liabilities and workforce), then that transfer of the entire business will not be subject to VAT.

 

Exemptions and reliefs

20. Are any exemptions or reliefs available to the liable party?

A company undergoing a merger may be able to defer its enterprise income tax (EIT) if the merger qualifies as a special reorganisation under the relevant PRC tax regulations (see Question 10).

The following tax benefits apply where a merger qualifies as a special reorganisation:

  • The surviving company obtains the carryover tax base on the assets and liabilities of the merged company.

  • The original income tax attributes of the merged company will be inherited by the surviving company.

  • The losses of the merged company, subject to a cap, may be carried forward to the surviving company.

  • The original shareholders of the merged company obtain the carryover tax base on the shares being paid for in the merger.

 

Transaction structures to minimise the tax burden

21. What transaction structures (if any) are commonly used to minimise the tax burden?

A merger structured as a special reorganisation can be used to defer enterprise income tax (EIT) (see Question 20).

 

Joint ventures

Taxes potentially payable

22. What taxes are potentially payable on establishing a joint venture company (JVC)?

Enterprise income tax (EIT)

A company can invest in the JVC by transferring its assets or shares to the JVC. For tax purposes, a capital injection in the form of an asset/share transfer will be deemed to be sold at fair market value, and the capital gains derived from the deemed sale will be subject to enterprise income tax (see Question 4).

Value-added tax (VAT)

A company can invest in the JVC by transferring its assets to the JVC. In China, a sale of goods will be subject to VAT (see Question 5).

Land value-added tax (LVAT)

A company can invest in the JVC by transferring its real property to the JVC. The JVC will be exempt from LVAT unless:

  • The JVC is a real estate developer.

  • The investor company is a real estate developer and it contributes its self-constructed real property to the JVC (see Question 6).

Deed tax (DT)

A company can invest in the JVC by transferring its real property to the JVC, and the JVC will be subject to deed tax on this transfer (see Question 6).

Stamp duty (SD)

The paid-in capital and capital reserve of the JVC will be subject to stamp duty at the rate of 0.05%.

Further, where a company invests in a JVC by transferring its shares or assets to the JVC, the JVC will be subject to stamp duty (see Question 3).

 

Exemptions and reliefs

23. Are any exemptions or reliefs available to the liable party?

A transfer of used fixed assets may be subject to a reduced VAT rate (see Question 15).

 

Transaction structures to minimise the tax burden

24. What transaction structures (if any) are commonly used to minimise the tax burden?

The investor company may prefer to provide intangible assets as a capital injection to the JVC, if this is possible. Where this is done:

  • The JVC can depreciate the assets to offset future operating income of the JVC.

  • The investor can avoid business tax on the disposal of intangible assets to provide the capital injection.

 

Company reorganisations

Taxes potentially payable

25. What taxes are potentially payable on a company reorganisation?

Enterprise income tax (EIT)

A company reorganisation can be achieved by a sale of assets and/or a sale of equity, and any capital gains derived from an asset disposal or a share disposal will be subject to enterprise income tax (see Question 4).

Business tax (BT)

A company reorganisation can involve transfer of land, real property and/or intangible assets, all of which will be subject to business tax (see Question 5).

Value-added tax (VAT)

A company reorganisation can involve a sale of goods which will be subject to VAT (see Question 5).

Land value-added tax (LVAT)

A company reorganisation can involve the transfer of real property which will be subject to land value-added tax (see Question 6).

Deed tax (DT)

A company reorganisation can involve the transfer of real property which will be subject to deed tax (see Question 15).

Stamp duty (SD)

Each party to a reorganisation agreement will be subject to stamp duty if the reorganisation agreement amounts to an equity transfer agreement, or if the reorganisation involves a change of title in real property. Any increase in the paid-in capital and/or capital reserve of the company will be subject to stamp duty at the rate of 0.05% (see Question 3).

 

Exemptions and reliefs

26. Are any exemptions or reliefs available to the liable party?

Enterprise income tax (EIT) can be deferred in a special reorganisation (see Questions 10, 15 and 21).

 

Transaction structures to minimise the tax burden

27. What transaction structures (if any) are commonly used to minimise the tax burden?

Enterprise income tax (EIT) can be deferred in a special reorganisation (see Questions 10, 15 and 21).

 

Restructuring and insolvency

28. What are the key tax implications of the business insolvency and restructuring procedures in your jurisdiction?

Tax implications for the business

Business insolvency and restructuring in China often involves debt restructuring schemes, which will give rise to income tax consequences. "Debt restructuring" refers to a process in which a creditor discharges some or all debts owed by a financially distressed debtor (the restructuring company) in accordance with a written agreement or a court ruling.

In a debt restructuring, the tax treatment in the relevant transactions must comply with the following rules:

  • In the case of a debt repayment with non-monetary assets, the transaction will be viewed as two separate transactions: a transfer of non-monetary assets, and a debt repayment at fair market value of non-monetary assets. The debtor must recognise the gains or losses generated from the relevant assets.

  • In the case of a debt-for-equity conversion, the transactions will be viewed as two separate transactions: a debt repayment and a share investment. The debtor must recognise the gains and losses from the debt discharge.

  • The debtor must recognise the gain from the debt restructuring based on the difference between the repaid debt payment and the tax base of the debts.

  • The creditor would recognise the loss from the debt restructuring based on the difference between the debt repayment received from the debtor and the tax base of the claims.

  • In principle, the debtor's relevant income tax payment attributes will remain unchanged.

Favourable tax treatment may be available for qualified debt restructurings. In particular, if the sum of the discharged debt income recognised by the debtor company is greater than 50% of the annual taxable income, then that discharged debt income can be spread evenly over a five-year period.

Tax implications for the owners

The debt restructuring does not have any direct tax implications for the shareholders of the debtor company.

Tax implications for the creditors

The creditor will recognise the loss made on the forgiven debt owed by the debtor. If the creditor is a China resident enterprise, it can deduct that loss from its taxable income for the purpose of assessing its enterprise income tax liability, provided certain formalities are fulfilled.

 

Share buybacks

Taxes potentially payable

29. What taxes are potentially payable on a share buyback? (List them and cross-refer to Questions 3 to 6 as appropriate.)

Share buybacks are not common in China. They can take the form of reducing the registered capital of shareholders, which would not give rise to any tax consequences.

 

Exemptions and reliefs

30. Are any exemptions or reliefs available to the liable party?

Not applicable (see Question 29).

 

Transaction structures to minimise the tax burden

31. What transaction structures (if any) are commonly used to minimise the tax burden?

Not applicable (see Question 29).

 

Private equity financed transactions: MBOs

Taxes potentially payable

32. What taxes are potentially payable on a management buyout (MBO)?

Enterprise income tax (EIT)

Under an MBO, the management team acquires the shares of the target company from the original shareholders of the target company. The original shareholders (assuming they are companies) will be subject to enterprise income tax on the capital gains, if any, derived from the sale of shares (see Question 4).

Business tax (BT)

A typical MBO will involve a loan agreement between the management team and the private equity fund. Any interest received by the private equity fund will be subject to business tax at a rate of 5% (see Question 5).

Stamp duty (SD)

Under an MBO, the management team and the original shareholders of the target company will draw up an equity transfer agreement, and each party to the equity transfer agreement will be subject to stamp duty (see Question 3).

 

Exemptions and reliefs

33. Are any exemptions or reliefs available to the liable party?

Not applicable.

 

Transaction structures to minimise the tax burden

34. What transaction structures (if any) are commonly used to minimise the tax burden?

Not applicable.

 

Reform

35. Please summarise any proposals for reform that will impact on the taxation of corporate transactions.

Since 2012 China has been undertaking pilot VAT reform so that business tax will be gradually replaced by VAT. Initially, the pilot VAT reform was implemented on a trial basis in the selected ten provinces and municipalities. From 1 August 2013, the pilot VAT reform will be implemented nationwide. Under the pilot VAT reform, rent received from the rental of movable tangible property (which used to pay business tax) will be taxed under the VAT regime.

 

Online resources

PRC State Administration of Taxation

W www.china.gov.cn

Description. This is the official website for PRC State Administration of Taxation. The website covers the main tax laws and regulations of PRC. An official English translation is not available on the official website.

Law Library

W www.law-lic.com/

Description. Law Library is an unofficial website which is open to the public. In Law Library, the main laws and regulations of PRC, as well as their unofficial English translations, can be searched and found.


Withholding tax requirements on dividends or other distributions, and exemptions/reliefs available on a share disposal

Jurisdiction

What is the withholding tax requirement on dividends or other distributions?

Are any tax exemptions or reliefs available on a share disposal?

China

A non-PRC tax resident will generally be subject to withholding tax on dividends.

The standard withholding tax rate is 10% if the taxpayer is a foreign enterprise. If the taxpayer is a foreign national individual, the standard withholding tax rate is 20%.

Tax exemptions or reliefs may be available under any relevant double tax treaty.

 

Contributor profiles

Tony Dong

King & Wood Mallesons

T +86 10 5878 5118
F +86 10 5878 5599
E tony.dong@cn.kwm.com
W www.kwm.com

Qualified. China, Attorney at Law, 2010; Certified Tax Agent, 2004

Areas of practice. Tax.

Recent transactions

  • Represented a well known European chemistry company in the negotiation and settlement of a high profile transfer pricing audit, achieving tax savings for more than RMB10 million.
  • Provided tax planning for M&A transactions and private equity investments.
  • Advised domestic companies in devising investment structure for outbound investment in Europe and Australia.
  • Assisted clients in negotiation with the tax authorities for tax crime assessment.

Alice Zhang

King & Wood Mallesons

T +86 10 5878 5118
F +86 10 5878 5599
E zhangci@cn.kwm.com
W www.kwm.com

Qualified. China, Attorney at Law, 2012; New York, US, 2010

Areas of practice. Tax.

Recent transactions

  • Advised QFIIs on the tax implications for investment in China.
  • Provided tax structuring advice for inbound and outbound investment.

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