China issues clearer guidance on beneficial ownership

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February 2018


Determining the Chinese beneficial ownership (BO) status of non-residents that derive dividends, interests, and royalties from China for purposes of tax treaty benefits historically has been difficult.  Since 2009, the State Administration of Taxation (SAT) has released several circulars on the topic, including Guoshuihan [2009] No.601 (Circular 601), which listed seven unfavorable factors for determining BO. The SAT also released Public Notice [2012] No.30 (Public Notice 30), which provided a safe-harbor rule for qualified non-tax residents to obtain treaty benefits with respect to dividends. Despite this guidance, taxpayers and local tax authorities in China encountered numerous technical and practical problems when dealing with BO-related cases, and they awaited further guidance from the SAT.

Therefore, on February 3, 2018, the SAT released long-awaited SAT Public Notice [2018] No.9 (Public Notice 9). Public Notice 9 revokes Circular 601 and Public Notice 30, and updates the assessment principles for BO determination. Compared to Circular 601 and Public Notice 30, Public Notice 9 includes two major breakthroughs for those claiming tax treaty benefits on dividends: it expands the group of non-residents that are eligible for the safe harbor, and it allows qualified treaty benefit applicants to apply a ‘same country/same treaty benefit rule’ under multi-tier holding structures. These changes will increase the ability of non-residents to obtain treaty benefits with respect to dividends.

The takeaway

There are still some uncertainties that need clarification. For example, regarding the first unfavorable factor, disputes may arise if the local tax authorities treat certain genuine intragroup transactions as factual payments. As for the second unfavorable factor, local tax authorities and applicants may have disputes regarding whether the applicant carries out substantive investment and management activities and whether the applicant’s other business activities are significant. Also, the examples stated in the explanatory notes to Public Notice 9 for the ‘same country/same treaty benefit rule’ are limited. In practice, other investment structures are not designed for treaty-shopping purposes, and it is unclear whether these types of structures also are eligible for the ‘same country/same treaty benefit’ rule.

MNEs should review their existing investment structures and business models in light of the extended safe harbor and the ‘same country/same treaty benefit’ rule and assess whether it is possible to realize these benefits.  In any event, MNEs should retain sufficient supporting documents such as contracts, invoices, receipts, and accounting entries in anticipation of tax authority challenges.

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Doug McHoney

International Tax Services Leader, PwC US

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