Announcement on Issues Relevant to the “Beneficial Owner” in Tax Agreements

(Issued by the State Administration of Taxation on February 3, 2018.)

SAT Announcement [2018] No.9

With a view to implementing the agreements for the avoidance of double taxation executed with foreign countries by the government of the People's Republic of China (Tax Agreements), we hereby notify you on issues relevant to determination of the status of beneficial owner in the provisions of Tax Agreements on dividends, interest and royalties as follows:

1.   The term “beneficial owner” means a party that owns and has control over income or the rights or property on the basis of which income is generated.

2.   When determining status as a beneficial owner of a resident of the other contracting state who wishes to benefit from the treatment under a Tax Agreement (the Applicant), a comprehensive analysis shall be conducted based on the factors set forth in this Article and in light of the actual circumstances of the specific case. Generally speaking, the following factors are unfavorable to a determination of an Applicant's status as a beneficial owner:

(1)        The Applicant is under obligation to pay at least 50% of the income to a resident of a third country (region) within 12 months of receipt of the income; “obligation” includes a contractually specified obligation and circumstances under which there is no contractually specified obligation but the fact of payment has arisen.

(2)        The business activities engaged in by the Applicant do not constitute substantive business activities. Substantive business activities include substantive manufacturing, marketing and management activities. Whether the business activities engaged in by the Applicant are substantive shall be determined based on the functions actually performed and the risks borne thereby.

The substantive investment holding management activities engaged in by an Applicant may constitute substantive business activities. Where an Applicant engages in investment holding management activities that do not constitute substantive business activities while simultaneously engaging in other business activities, if the other business activities are not sufficiently prominent, substantive business activities are not constituted.

(3)        The other contracting state (region) does not levy or exempts tax on the relevant income or, although it does levy tax, the actual tax rate is extremely low.

(4)        In addition to the loan contract on the basis of which interest is generated and paid, there exists another loan contract or deposit contract between the creditor and a third party that is similar in amount, interest rate, time of execution, etc.

(5)        in addition to the contract for the assignment of the right to use such as a copyright, patent or technology contract on the basis of which royalties are generated and paid, there exists another contract concerning the assignment of the right to use, or of the ownership of, the relevant copyright, patent, technology, etc. between the Applicant and a third party.

3.   If the income derived in China by an Applicant is dividends and although the Applicant does not satisfy the conditions for being a beneficial owner, a party that directly or indirectly holds 100% of the shares of the Applicant satisfies the conditions for being a beneficial owner, and either of the circumstances set forth below applies, the Applicant shall be deemed as having the status of beneficial owner:

(1)        the aforementioned party that satisfies the conditions for being a beneficial owner is a resident of the country (region) where the Applicant is resident; or

(2)        although the aforementioned party that satisfies the conditions for being a beneficial owner is not a resident of the country (region) where the Applicant is resident, both such party and the intermediate layer under an indirect shareholding situation are parties that satisfy the conditions.

The phrase “satisfies the conditions for being a beneficial owner” means that, after a comprehensive analysis, it may be determined pursuant to Article 2 hereof that the party in question has the status of beneficial owner.

The term “party that satisfies the conditions” means that, when the income derived in China by the party in question is dividends, the treatment available under the Tax Agreement executed between China and the country (region) where such party is resident is identical or more favorable than that available to the Applicant.

4.   When the income derived in China by an Applicant as set forth below is dividends, the comprehensive analysis may be conducted without consideration of the factors set forth in Article 2 hereof and a direct determination of the Applicant's status as a beneficial owner may be made:

(1)        the government of the other contracting state;

(2)        a company that is a resident of, and listed in, the other contracting state;

(3)        an individual who is a resident of the other contracting state; or

(4)        an Applicant, 100% of whose shares are directly or indirectly held by one or more of the parties specified in items (1) to (3) and the intermediate layer under the indirect shareholding situation is a Chinese resident or a resident of the other contracting state.

5.   The shareholding percentage required by Articles 3 and 4 hereof shall have been maintained at all times for 12 months in succession before the dividends were obtained.

6.   Agents, designated payees or other such parties (hereinafter collectively referred to as “Agents”) are not beneficial owners. The receipt of income by an Applicant through an Agent shall not affect the determination of the Applicant's status as a beneficial owner, regardless of whether the Agent is a resident of the other contracting state or not.

The dividends derived by a shareholder based on the shares held thereby, the interest derived by a creditor based on the claim held thereby and the royalties derived by a licensor based on the grant of the license are not “income received through an Agent” for the purposes of this Article.

7.   When determining status as a beneficial owner based on the factors set forth in Article 2 hereof, different types of income may be differentiated through a comprehensive analysis of documentation and information such as the articles of association of the company, the company's financial statements, fund flow records, board meeting minutes, board resolutions, capacity of human and physical resources, relevant expenses and expenditures, bearing of functions and risks, loan contracts, proprietary right licensing and assignment contracts, patent registration certificates and copyright title certificates. To determine whether income is received through an Agent as specified in Article 6 hereof, the analysis shall be conducted on the basis of documentation such as the agency contract or designated payment receipt contract.

8.   If an Applicant needs to prove that it has the status of beneficial owner, it shall submit the relevant supporting documentation in accordance with Article 7 of the State Administration of Taxation, Announcement on the Issuance of the Measures for the Administration of the Treatment for Which Non-tax-residents are Eligible Under Tax Agreements (Announcement of the State Administration of Taxation No.60 of 2015). If the Applicant has the status of beneficial owner pursuant to Article 3 hereof, it shall, in addition to providing its tax residency certificate, provide the tax residency certificate issued by the competent tax authority of the country (region) where the party that satisfies the conditions for being a beneficial owner is resident and of the country (region) where the party that satisfies the conditions is resident. If the Applicant has the status of beneficial owner pursuant to item (4) of Article 4 hereof, it shall, in addition to providing its tax residency certificate, provide the tax residency certificate issued by the competent tax authority of the country (region) where the party directly or indirectly holding 100% of the shares of the Applicant is resident and of the country (region) where the intermediate layer is resident. A tax residency certificate shall evidence tax-resident status for the year in which the income is derived or the preceding year thereof.

9.   Where, in the course of the subsequent administration by the competent tax authority, an Applicant itself pays back taxes because it does not have the status of beneficial owner, the competent tax authority shall submit the case, level by level, to the provincial tax authority for the record. Where the competent tax authority deems that the status of the Applicant as beneficial owner ought to be denied, it shall do so after approval by the provincial tax authority.

10.   If an Applicant has the status of beneficial owner but the competent tax authority discovers that the principal purpose test provision of the Tax Agreement or the general anti-tax avoidance rules of domestic tax laws are applicable, the relevant general anti-tax avoidance provisions shall apply.

11.   The determination of status as a beneficial owner under the provisions on dividends, interest and royalties of the Arrangement Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and the Arrangement Between the Mainland of China and the Macao Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income shall be handled in accordance herewith.

The submission of tax residency certificates by Hong Kong residents shall be handled in accordance with the State Administration of Taxation, Announcement on Issues Relevant to the Use of Hong Kong Resident Identity Cards in Mainland China (Announcement of the State Administration of Taxation No.35 of 2016).

12.   This Announcement shall apply to matters on the enjoyment of Tax Agreement treatment in connection with tax obligations and withholding obligations arising on and after April 1, 2018. The State Administration of Taxation, Circular on How to Interpret and Recognize the “Beneficial Owner” in Tax Agreements (Guo Shui Han [2009] No.601) and the State Administration of Taxation, Announcement on the Recognition of the “Beneficial Owner” in Tax Agreements (Announcement of the State Administration of Taxation No.30 of 2012) shall be repealed simultaneously.