Paying the right taxes

This article is from the Tax chapter of the 2015 Annual Review and is available for download here.


Cheng (Ron) Ma of Jingtian & Gongcheng highlights the latest developments in enterprise and individual income tax, indirect transfers, QFIIs and RQFIIs, SPVs and tax incentives that affect foreign investors

1. What have been the key legislative developments affecting tax over the past 12 months?

During the past 12 months, enterprise income tax has been the centre of attention in China's tax legislation. In particular, from the end of 2014 to the first half of 2015, the Ministry of Finance and State Administration of Taxation (SAT) issued a series of regulatory documents one after the other. These new regulations focus adjustments in two fields.

The first field is enterprise restructurings, e.g. Circulars Cai Shui No.109 and No.116 issued at the end of last year, this year's Announcement No.40 and the recent Announcement No.48 of the SAT. The major adjustments include:

(1) Relaxation of certain substantive conditions and procedural requirements for the application of special tax treatment in enterprise restructurings;

(2) Circular No.116 clarifies that a capital contribution made by an enterprise in the form of non-monetary assets is to be treated as an asset transfer and enterprise income tax paid thereon, but it also expands to the entire country as the policy originally implemented in the Shanghai FTZ of permitting deferral of payment over five years; and

(3) Circular No.109 introduces a completely new special tax treatment method: allocation (Huazhuan). This has opened up new tax planning opportunities for China tax-resident enterprises, including foreign-invested enterprises, carrying out restructurings. But how this will dovetail with civil/commercial laws and the requirements of business and other registration authorities in practice is a topic that poses numerous challenges.

Additionally, new regulations addressing individual income tax, land value-added tax and deed tax in connection with enterprise restructurings have also been issued.

The second field of focus is the prevention of tax evasion. Firstly, with respect to the famous document No.698 that introduced the concept of “indirect transfers”, the SAT comprehensively upgraded the same this year in the form of Announcement No.7. Furthermore, the SAT's Announcement No.16 issued in March this year imposes anti-tax evasion restrictions with respect to the income tax treatment of expenses paid by enterprises to overseas affiliated parties, an important move echoing and implementing the OECD's base erosion and profit shifting (BEPS) action plan.

In terms of individual income tax, Announcement No.67 of the SAT issued in December last year is an important development in the individual income tax treatment of equity transfers. Circular No.35 of the Ministry of Finance and the SAT, issued at the end of March this year, permits individuals to decide at their own discretion on the timetable for paying individual income tax in instalments with respect to capital contributions made in the form of non-monetary assets. However, compared with the stream of new enterprise income tax regulations, the individual income tax reforms still lag behind.

2. What is the significance of the Announcement on Enterprise Income Tax Issues Relevant to the Payment of Expenses by Enterprises to Overseas Affiliates issued on March 18?

As China's most recent response to the OECD's BEPS action plan, Circular No.16 has an important effect on the cross-border tax arrangements in China of multinational corporations. In the anti-tax evasion legislation regime, Circular No.16 is part of the special tax adjustments for transfer pricing, but it specifies in an extremely salient manner that expenses paid by an enterprise to an overseas affiliated party that does not perform functions, does not bear risks and does not have any substantive business activities may not be deducted when calculating the enterprise's taxable income. This implies that the Chinese tax authorities can now, under specific circumstances, break away from the complicated price fairness analyses of transfer pricing and directly deny transactions as a whole. The cross-border affiliated transactions listed by Circular No.16 that may potentially be denied include the service fees that an enterprise in China pays to an overseas affiliated party; the royalties charged by an overseas affiliated party to the domestic enterprise based on intangible assets; and the royalties paid by an enterprise in China to an overseas affiliated party for the fringe benefits it enjoys in connection with the offshore financing activities of the overseas affiliated party. Due to these legal exceptions, Circular No.16 introduces a number of test criteria, but the analyses are all qualitative, rather than quantitative, in nature. This raises the likelihood of triggering disputes between taxpayers and the tax authorities in practice.

For multinationals, if Chinese tax authorities, pursuant to Circular No.16, do not permit pre-tax deduction by enterprises of the expenses that overseas entities charge affiliates in China, and they are required to pay withholding tax in China on such expenses (e.g. royalties), they will be subject to double taxation, which cannot be eliminated under Chinese laws.

Accordingly, multinational corporations need to review in great detail the arrangements for the payment of such expenses with their affiliates in China and duly prepare and record the documentation for the same period in accordance with the requirements of Chinese laws and regulations on transfer pricing.

3. How should foreign companies comply with China's latest indirect transfer rules?

The Announcement on Several Issues Concerning Enterprise Income Tax on the Indirect Property Transfers of Non-tax-resident Enterprises (Announcement No.7) issued by the SAT in February this year is a completely new upgrade to the Circular Gou Shui Han No.698 of 2009, and comprehensively updates China's regime against the evasion of enterprise income tax on “indirect transfers”.

When applying Announcement No.7, foreign enterprises should pay attention to the following changes:

(1) Announcement No.7 expands the scope of application of “indirect transfer”, not only including an “indirect transfer” by an overseas enterprise of equity in an enterprise in China (Circular No.698), but also including the “indirect transfer” of immovable property in China and of the property of establishments in China;

(2) Announcement No.7 abolishes the obligation of the transferor in an “indirect transaction” to report, on its own initiative, to the Chinese tax authority after the occurrence of a transaction, but additionally bestows, on the transferor, the transferee and the domestic enterprise whose equity is indirectly transferred, the “right” to report the same to the tax authority. Furthermore, Announcement No.7 unprecedentedly requires overseas transferees to bear a “withholding obligation”, and, as this may be reduced or exempted by prompt reporting to the tax authorities, it is sufficient to cause an overseas transferee to a transaction to opt to report on its own initiative or compel the transferor to report the transaction to the tax authority, in order to avoid falling into compliance problems;

(3) Announcement No.7 expressly provides for “safe harbours” such as “open market operations”, tax treaties and internal restructurings, but the conditions for the application are relatively stringent; and

(4) Announcement No.7 sets forth a series of conditions for directly finding that the transaction structures of “indirect transfers” do not have a “reasonable commercial purpose” and require an anti-tax evasion adjustment, including quantitative test conditions for assets, revenues and equity value, facilitating determinations by basic-level tax authorities and reducing enterprises' room for objection.

4. What do QDII, QFII and RQFII investors need to know about the latest tax regulations?

After several years of haggling with QFIIs over the issue of whether they were required to pay enterprise income tax on revenue derived in China from the transfer of stocks, etc., the Chinese finance and tax authorities finally rendered a sweeping decision by way of the Circular on the Issue of Provisionally Exempting the Proceeds Derived in China by QFIIs and RQFIIs from the Transfer of Stocks and Other Such Equity Investment Assets from Enterprise Income Tax (Cai Shui [2014] No.79) on October 31 last year, specifying that, from November 17 2014, the income derived in China by qualified foreign institutional investors (QFIIs) and renminbi qualified foreign institutional investors (RQFIIs) from the transfer of stocks and other such equity type assets is exempt from enterprise income tax for the time being. However, the aforementioned income derived by QFIIs and RQFIIs before November 17 2014 is subject to enterprise income tax in accordance with the law.

5. What are some important developments this year regarding double tax treaties with other jurisdictions?

China is continuing to update its tax treaties with the developed countries in Europe, with the new treaties with France, the Netherlands and Switzerland having come into effect on January 1 2015. It is anticipated that new treaties with Germany and Russia will soon enter into effect.

The major changes in these new treaties include the following:

(1) permanent establishments: the condition for determining a construction-type permanent establishment has been increased from six months to 12 months (and for Russia, 18 months); and the condition for determining a service-type permanent establishment has been revised from six months to 183 days;

(2) dividends: the single tax rate of 10% has been adjusted to two-tier or three-tier tax rates, in particular, in circumstances where at least 25% of the share capital is held directly, a lower tax rate of 5% is generally accorded (similar to the tax arrangements between the mainland and Hong Kong);

(3) royalties: a lower tax rate (6% and for Switzerland 9%) is generally accorded for equipment rent;

(4) capital gains and other income: the principle of levying tax based on the country where the property is located or sourced is generally revised to the country of residence principle (the Netherlands however remaining with source country);

(5) prevention of tax evasion: generally reformulated or newly formulated based on the OECD's BEPS project; and

(6) mutual assistance procedure: generally reformulated or newly formulated to provide a bilateral remedy mechanism for enterprises of one contracting state that are unable to effectively avail themselves of the tax treaty treatment in the other contracting state.

6. Have there been any new corporate tax incentives in China with respect to specific regions, projects, sectors and industries issued in the past 12 months?

The National Development and Reform Commission promulgated the Catalogue of Encouraged Industries in Western China, which entered into effect on October 1 2014. Enterprises established in Western China that have a project in an encouraged industry newly added to the Catalogue of Encouraged Industries in Western China as their main business, with annual revenues derived from the business accounting for at least 70% of their gross revenues, can pay enterprise income tax at the reduced rate of 15%.

The conditions for small and micro-profit enterprises to be eligible for enterprise income tax relief have been further relaxed. From October 1 2015, the effective tax rate of small and micro-profit enterprises whose annual taxable income is Rmb300,000 (previously Rmb200,000) or less is reduced to 10%.

For fixed assets newly purchased on or after January 1 2014 by enterprises in six industries, namely biopharmaceutical manufacturing, specialised equipment manufacturing, manufacturing of railway, ship, aviation, aerospace and other transport equipment, manufacturing of computers, communication and other electronic equipment, manufacturing of instruments and meters and the information transmission, software and information technology service industry, their depreciable life may be reduced or an accelerated depreciation method adopted.

One point worth mentioning and of interest is that, on November 27 last year, the State Council issued the Circular Guo Fa [2014] No.62 requiring the various regions to screen and clean up local incentive policies. The local tax authorities of Shenzhen, etc. then halted the implementation of a tax incentive policy for venture capital limited partnerships, and the various regions took a prudent attitude with respect to the offering of financial and tax incentives. However, in May this year, the State Council issued the Circular Guo Fa [2015] No.25 specifying that the incentive policies already issued by the various regions and authorities may continue to be implemented for their specified period of time, and that the dedicated clean-up work specified in Circular No.62 is provisionally halted.

7. Are there unique tax issues for VIEs and other arrangements involving offshore structures that investors need to be aware of?

At the moment, foreign investors in typical VIE and “red chip” structures should pay particular attention to the following Chinese tax issues:

(1) withholding income tax treatment for the dividends paid by an enterprise in China to an overseas enterprise, including the issue of determination of the “beneficial owner” when applying the treatment under a tax treaty;

(2) when paying royalties or service fees to an overseas enterprise, an enterprise in China could face stricter anti-tax evasion adjustments (Announcement No.16);

(3) an overseas investor transferring equity outside China (including mergers, buybacks, etc.) could face the risk of an anti-tax evasion investigation on an “indirect transfer” (Announcement No.7 and Circular No. 698); and

(4) the special purpose vehicles established abroad by Chinese investors could face the issue of a finding of a “foreign registered tax-resident enterprise”.

8. What tax reforms are in the pipeline?

Only a small number of sectors, namely the construction industry, immovable property (transfer, lease), the daily life service industry and financial and insurance industries, remain subject to business tax. It is anticipated that the “replacement of business tax with value-added tax” reform will enter its final stage in the second half of 2015. Perhaps next year, when looking ahead, the concept of “business tax” will have disappeared from China's indirect tax regime.

China's tax procedure law, the PRC Law on the Administration of the Levy and Collection of Taxes, is currently undergoing major revisions. In January this year, the State Council sought public comments on the revised draft.

Furthermore, in March this year, the amended PRC Legislation Law adopted at the Third Session of the 12th National People's Congress sets “basic tax systems such as the creation of taxes, the determination of tax rates and the administration of the levy of taxes” as matters that may only be provided for in laws, which is generally interpreted as China having expressly established the “principle of tax levy determined by laws”. At present, China's tax legislation is mostly found at the lower levels, and after the amendment of the Legislation Law - the legislative basis for many taxes, including value-added tax - finds itself in the awkward position of being in conflict with the Legislation Law. Accordingly, it can be anticipated that, in the coming few years, China will be required to comprehensively restructure and rebuild its tax legislation regime.


Author biography

Cheng (Ron) Ma
Partner

Cheng (Ron) Ma is a partner of Jingtian & Gongcheng. He started his legal practices in June 2004 and worked
for Jun He Law Offices and Han Jun Law Office successively. He took part in the founding of Run Ming
Law Office as a partner in 2007. Prior to that, he worked for the Beijing Branch of Deloitte & Touche as a tax manager for many years. Cheng provides legal and tax consulting and advisory services for foreign and Chinese domestic clients of various industries, e.g. retail, logistic, pharmacy, energy, manufacturing, urban transportation, software, ISP, high-technology, and has extensive practical experiences in establishing various foreign invested vehicles, enterprise restructuring, IPO, mergers & acquisitions and cross-border transactions. With his unique experiences in the tax area, Cheng is one of the few Chinese lawyers who have both strong legal and tax knowledge and expertise, and can therefore act as a tax consultant as well as legal counsel in such projects.

竞天公诚律师事务所的马骋律师重点探讨了企业和个人所得税的最新发展、间接转让、QFIIs和RQFIIs、SPVs及外商的税务优惠

1. 过去12个月，税务方面出台了什么主要法规？

过去的12个月，中国税务立法的热点集中在企业所得税领域。尤其是从去年年底到今年上半年，财政部、国家税务总局密集出台了一系列规范性文件。这些新规集中调整两个领域。

第一个领域是企业重组，如去年年底的财税109号通知、116号通知，今年的国家税务总局40号公告和最近的48号公告等。主要调整包括：

(1) 放宽了企业重组适用特殊性税务处理的部分实体条件和程序要求。

(2) 116号通知明确了企业以非货币资产出资需要视同资产转让缴纳企业所得税，但同时将原在上海自贸区内实行的允许分5年递延缴纳的政策推广到了全国。

(3) 109号通知引入了全新的特殊性税务处理途径——划拨。这为包括外商投资企业在内的中国居民企业进行重组创造了新的税务筹划空间，但是在实践中，如何与民商事法律以及工商等登记机关的要求相衔接，将是一个富有挑战性的话题。

同时，企业重组相关的个人所得税、土地增值税和契税也有新的法规出台。

第二个领域是反避税。首先，对于非常有名的引入“间接转让”概念的698号文，国家税务总局今年以7号公告的形式进行了全面升级。另外，今年3月的国家税务总局16号公告对企业向境外关联方支付费用的所得税处理进行了反避税限制，则是呼应和落实OECD税基侵蚀和利润转移（BEPS）行动计划的重要举措。

个人所得税方面，去年12月的国家税务总局67号公告是股权转让个人所得税处理的一个重大进展。今年3月底财政部、国家税务总局的35号通知允许个人就以非货币资产出资应缴纳的个人所得税自行决定分期缴税的时间表。然而，不得不说，与企业所得税的新规迭出相比，个人所得税的改革仍然迟缓。

2. 3月18日发布的《关于企业向境外关联方支付费用有关企业所得税问题的公告》有什么重要的影响？

作为中国对OECD税基侵蚀和利润转移（BEPS）行动计划的最新回应，题述通知（下称“16号通知”）对跨国公司在中国的跨境税务安排有着重要影响。16号通知从反避税立法体系上属于转让定价特别纳税调整的一部分，但它非常醒目的规定了企业向未履行功能、承担风险，无实质性经营活动的境外关联方支付的费用，在计算企业应纳税所得额时不得扣除。这意味着中国税务机关现在在特定情况下可以摆脱繁琐的转让定价价格公允性分析，直接将交易整体否定。16号通知明确列出有可能被整体否定的跨境关联交易包括：境内企业向境外关联方支付的劳务费用；境外关联方基于无形资产向境内企业收取的特许权使用费；以及境内企业因境外关联方的境外融资活动享受附带利益而向境外关联方支付的特许权使用费。16号通知为此引入了多项测试标准，但均属于定性分析而非量化标准，因此在实践中很可能引发纳税人与税务机关的争议。

对于跨国公司而言，一旦其中国境外主体向境内关联企业收取的费用被中国税务机关依据16号通知不允许在境内企业税前扣除，而当这些费用（如特许权使用费）还需要在中国缴纳预提所得税时，就会形成了双重纳税，并且这种双重纳税是中国国内法下无法消除的。

因此，跨国公司需要非常仔细的重新审视其与中国境内关联企业之间的此类费用支付安排，并且按照中国转让定价法律法规的要求做好同期资料的准备和备案。

3. 企业应如何遵行中国最新的定价转让规定？

国家税务总局今年2月发布的《关于非居民企业间接转让财产企业所得税若干问题的公告》（下称“7号公告”）是对2009年国税函698号通知的全新升级，全面更新了中国关于“间接转让”的企业所得税反避税体制。

外国企业在适用7号公告时应当注意下列变化：

(1) 7号公告扩大了“间接转让”的适用范围，不仅包括境外企业“间接转让”中国境内企业股权（698号通知），也包括“间接转让”中国境内不动产、以及中国境内机构、场所的财产；

(2) 7号公告取消了“间接转让”中的转让方应当在交易发生后主动向中国税务机关报告的义务（698号通知），但是同时又赋予了转让方、受让方和被间接转让股权的境内企业可以向中国税务机关报告的“权利”。并且，7号公告破天荒的要求境外受让方承担“代扣代缴义务”，而且这种义务可以因及时向税务机关报告而减轻甚至豁免，足以使得交易中的境外受让方为了避免陷入合规性麻烦而选择主动向税务机关报告交易或者迫使转让方进行报告；

(3) 7号公告明确了“公开市场交易”、税收协定和内部重组等“安全港”，但适用条件较为苛刻；

(4) 7号公告规定了一系列可以直接认定“间接转让”交易结构不具有“合理商业目的”而需要进行反避税调整的条件，其中包括资产、收入和股权价值的量化测试条件，便于基层税务机关的判定，也压缩了企业的抗辩空间。

4. 对于最新的税务法规，合格境内外投资者和人民币合格境外投资者有什么是需要知道的？

中国财政、税务当局在与QFII就QFII从中国境内取得的股票等转让收入是否应缴纳企业所得税问题进行了数年的讨价还价之后，终于在去年10月31日以《关于QFII和RQFII取得中国境内的股票等权益性投资资产转让所得暂免征收企业所得税问题的通知》（财税[2014]79号）作出了“一刀切”的决定，规定从2014年11月17日起，对合格境外机构投资者（简称QFII）、人民币合格境外机构投资者（简称RQFII）取得来源于中国境内的股票等权益性投资资产转让所得，暂免征收企业所得税。在2014年11月17日之前QFII和RQFII取得的上述所得应依法征收企业所得税。

5. 今年与其他司法管辖区之间的避免双重征税条约方面，有什么重要的发展？

中国仍在陆续更新其与欧洲发达国家之间的税收协定，与法国、荷兰、瑞士的新协定均已于2015年1月1日起执行，与德国、俄罗斯的新协定预计也将很快执行。

这一批新协定的主要变化包括：

(1) 常设机构——将建筑类常设机构的判定条件从6个月延长到12个月（俄罗斯为18个月）；将服务类常设机构的判定条件从6个月调整为183天；

(2) 股息——将10%的单一税率，调整为二档或三档税率，尤其是对于直接持股25%以上股本的情况普遍给以了5%的低税率（与内地与香港的税收安排类似）；

(3) 特许权使用费——对设备租金普遍给以低税率（6%，瑞士为9%）；

(4) 财产收益以及其他所得——将财产所在地国或来源地国征税原则普遍调整为居民国征税原则（荷兰仍为来源地国）；

(5) 反避税——普遍根据OECD税基侵蚀和利润转移（BEPS）项目的原则进行了重订或新订；

(6) 普遍重订或新订了相互协助程序，为缔约国一方企业在另一方无法有效享受税收协定待遇提供了双边救济机制。

6. 过去12个月中国在特定区域、项目、领域和行业方面有什么新的企业税务优惠?

国家发展改革委员会颁布了《西部地区鼓励类产业目录》并于2014年10月1日起实施。设在西部地区以《西部地区鼓励类产业目录》中新增鼓励类产业项目为主营业务，且其当年度主营业务收入占企业收入总额70%以上的企业，可减按15%税率缴纳企业所得税。

小型微利企业享受企业所得税优惠的条件进一步放宽，自2015年10月1日起，年应纳税所得额低于30万元（含30万元，原为20万元）的小型微利企业，实际税率减到10%。

生物药品制造业，专用设备制造业，铁路、船舶、航空航天和其他运输设备制造业，计算机、通信和其他电子设备制造业，仪器仪表制造业，信息传输、软件和信息技术服务业等6个行业的企业2014年1月1日后新购进的固定资产，可缩短折旧年限或采取加速折旧的方法。

值得注意也耐人寻味的是：去年11月27日，国务院下发国发[2014]62号通知，要求各地排查和清理地方性优惠政策。通知出台后，深圳等地税务机关停止了创业投资有限合伙企业税务优惠政策的执行，各地对于给以地方性的财税优惠政策也持谨慎态度。但在今年5月，国务院又以国发[2015]25号通知规定各地各部门已经出台的优惠政策可按规定期限继续执行，并且国发[2014]62号通知规定的专项清理工作暂停。

7. 涉及境外结构的VIEs或其他安排，有什么独特的税务问题是投资者需要注意的？

典型VIE结构或“红筹”结构的境外投资者近期应当特别关注下列中国税务问题：

(1) 境内企业向境外企业支付股息的预提所得税待遇，包括适用税收协定待遇时需注意的“受益所有人”认定问题；

(2) 境内企业向境外企业支付特许权使用费或服务费用可能面临的更加严厉的反避税调整（16号公告）；

(3) 境外投资者在中国境外转让股权（包括合并、回购等）可能面临的“间接转让”反避税调查风险（7号公告和698号通知）；

(4) 中国投资者在境外设立的特殊目的公司可能面临的“境外注册居民企业”判定问题。

8. 有什么税务改革是在酝酿阶段？

营业税所剩下的只有建筑业、不动产（转让、租赁）、生活服务业、金融保险业不多的几个领域。预计在今年下半年“营改增”改革会进入最后阶段。或许明年再进行展望时，中国的间接税体系中就已经没有“营业税”的概念了。

中国税政的程序法——《中华人民共和国税收征收管理法》目前也正在进行大幅度修改的过程中。今年1月，国务院已就修改稿草案公开征求意见。

此外，值得关注的是，今年3月，十二届全国人民代表大会第三次会议通过的修订后的《立法法》将“税种的设立、税率的确定和税收征收管理等税收基本制度”列为只能由法律规定的事项，这被普遍认为是中国明确确立了“税收法定原则”。目前中国的税务立法普遍层级偏低，在《立法法》修订后，包括增值税在内的许多税种的立法依据都处于与《立法法》冲突的尴尬境地。因此，可以预计在未来数年内，中国需要对其税务立法体系进行全面的整理和重建。


作者简历

马骋
合伙人

马骋律师是竞天公诚律师事务所的合伙人。马律师在2004年开始其法律职业生涯，先后加入君合律师事务所、汉坤律师事务所，并曾是润明律师事务所的创始合伙人之一。在此之前，他曾工作于德勤华永会计师事务所北京分所多年，担任税务经理。马律师为零售、物流、制药、能源、制造业、城市交通、软件、网络增值电信、高新技术、矿产等行业的内外资客户提供法律和税务咨询服务，具备设立各类投资工具、处理企业IPO、企业重组、兼并收购和各类跨境和境内交易的娴熟实践经验。作为中国律师中不多见的具有扎实税务专业知识者，他在外商直接投资、企业并购、上市等项目中除了常见法律服务外，还能同时起到税务顾问的作用。