BVI companies should review holding structures

Companies should also be more cautious now when using the BVI structure. Spark Shi, a Beijing-based tax partner at Hwuason Lawyers said: “The most important rule is that you not employ too simple a structure involving a tax haven.”

If some BVI company owners are “hiding behind the ownership veil” and gaining undue tax advantages, the Agreement signals a more aggressive and tightened enforcement tax regime.

“Before this, the SAT did not have jurisdiction over BVI companies so it was difficult to tell the legitimacy of many companies, and thus they were able to use illegal or improper tax plans to reduce the tax burden,” said Shi. “But with the information exchange there's no way to hide these tax structures anymore.”

Although tax avoidance won't entirely be wiped out, the Agreement will help minimise the unmerited advantages gradually, said Ni. “The fact Chinese tax authorities are closing in would potentially force some owners of BVI companies to adapt to the new enforcement environment.”

However, there is no need for BVI companies to panic about sudden or blanket investigations. Ni pointed out that PRC authorities could only make specific tax information requests, so that “if the Chinese tax authorities go that far to make an international request, they often have a pretty solid case on their hands already”.

The tax information request from PRC officials could target financial institutions or other persons acting in an agency or fiduciary capacity, including nominees and trustees. The Chinese representatives could meet the taxpayers involved, inspect the record, and attend the tax audit on-site in the BVI.

The attractiveness of the BVI holding structure likely won't be too marred by the new tax information exchange system. PRC tax is just one of the many factors that foreign or Chinese investors consider when they opt for the BVI structure in the first place. “They would not abandon this simply for a change in one parameter,” said Ni.