Revisit offshore SPVs to avoid taxation

Counsel are again highlighting the importance of two recent changes in Chinese law: the PRC's new tax Circular 698, and the Supreme People's Court's nominal clarification of material adverse change clauses.

“Investors should consider that holding vehicles in treaty jurisdictions may not have the benefit of reduced withholding rates under the treaties, and that transactions in shares of offshore holding vehicles may also be subject to PRC tax,” said Cleary Gottlieb Steen & Hamilton's Filip Moerman while speaking about Circular 698 at IFLR's 2010 M&A Forum. “A purchaser may be at risk post-closing of challenge by the tax authorities that it should have withheld capital gains tax at closing.”

Tax Circular 698, the full name of which is the Circular on Strengthening the Administration of Enterprise Income Tax on Income Derived from the Transfer of Equity of Non-tax-resident Enterprises (关于加强非居民企业股权转让所得企业所得税管理的通知), was released in December 2009. It “was issued to tighten the administration for enterprise income tax collection on equity transfer gains derived by Non-TREs from China,” according to Danny Po of PricewaterhouseCoopers, who analysed the Circular in a recent issue of China Law & Practice (see CLP February 2010, page 18).