"Beneficial owner" Enjoy provisions of the tax association


Date:  2018-06-30    Autor:   CAO, Edmund

Key words: beneficial owner, investment holding managemententerprise, comparison between old and new regulation

To standardize the tax treaty dividends, interest, royalties clause in application of the concept of "beneficial owner" agreement to prevent abuse, at the same time on the problems in practice corresponding adjustment and clear. on February 3, 2018, State administration of Taxation issues the state administration of taxation announcement No. 9, 2018, <the state administration of taxation on tax treaty "beneficial owner" in the announcement concerning the issues> (hereinafter referred to as the "Notice 9”)

The new regulation mergered <the state administration of taxation on how to understand and recognized in the tax treaty "beneficial owner" notice> (Guoshuihan [2009] no. 601), <the state administration of taxation on the confirmation in the tax treaty "beneficial owner" announcement > (the state administration of taxation announced the 30th 2012). To be better specification in the practical operation of each project doubt.

1.    Clarify the application criteria for investment holding management enterprises

During the practical operation, we care about that sometimes the"beneficial owner" are regarded as the management of investment holding enterprise, most of this type of beneficial owner can not enjoy preferential tax treaty process. As for the above situation, the second item of article 2 of notice no. 9 clearly states that the substantial investment holding management activities undertaken by the applicant can constitute the substantive business activities., the interpretation of 9 notice given by the state administration of taxation, the key points are given: the function of the actual performance and risk has a substantial enough to confirmits activities, namely to give evidence in the early stage of the investment research, assessment analysis,investment decision-making, implementation of investment and investment follow-up management activities. In the case of the above-mentioned requirements, the enterprises managed by the "beneficial owner" as an investment holding company can enjoy the preferential tax agreement through the identification procedure of the "beneficial owner".


2.    
Comparison of new and oldregulations

At the same time, we listed the major changes of the new and old regulations in the following table:

Related regulations (old)

Related regulations (New)

Main purpose

The state administration of  taxation promulgated article 3 of article 30 of 2012

In the application for tax  benefits by residents of parties to the tax treaties (hereafter referred to  as "applicants") that derive incomes from China in terms of  dividends, the identity of the beneficial owners can be directly determined  if the applicants are companies that are listed as parties to the tax  treaties, or the applicants are 100% directly or indirectly owned by companies  that are also residents of a party to the tax treaties (excluding the  situation where shares of the applicants are indirectly held through  non-Chinese residents or third-party countries who are not parties to the tax  treaties, or regional resident companies) and the dividends come from holding  stock of the listed companies.

The state administration of  taxation announced article 4 of article 9 of 2018

IV. When the proceeds from China  obtained by the following applicants are dividends, the applicants may be determined  directly as "beneficial owners" without the need to conduct a  comprehensive analysis based on the factors specified in Article 2 hereof:

1.      The governments of the  counterparties;

2.      The residents of the  counterparties who are companies listed in the counterparties;

3.      The individual residents of the  counterparties; and

4.      The applicants whose 100% shares  are directly or indirectly held by one or more persons specified in Items 1  to 3, and the intermediate layers indirectly holding shares are residents of  China or residents of the counterparties.

Expand the scope of safe harbor  prescribed in the Announcement No.30  

No. 601 of the state tax letter  [2009] and no. 30 of 2012 issued by the state administration of taxation

If the applicant does not qualify  as a "beneficial owner" or a safe port, the proceeds from China  will not be eligible for tax treaty treatment.

The state administration of  taxation announced article 3 of article 9 of 2018

When the proceeds obtained from  China by an applicant are dividends, though the applicant does not meet the  conditions for "beneficiary owners", the person who directly or  indirectly holds 100% shares of the applicant meets such conditions and falls  under either of the following circumstances, the person shall be deemed as a  "beneficial owner":

1.      The above person meeting the  conditions for "beneficial owners" is a resident of the country  (region) of residence of the applicant; and

2.      Although the above person meeting  the conditions for "beneficial owners" is not a resident of the country  (region) of residence of the applicant, both the person and the intermediate  layers indirectly holding shares are eligible persons.

"Meeting the conditions for  'beneficiary owners'" means that a person may be determined as a  "beneficial owner" after a comprehensive analysis conducted in  accordance with Article 2 of the Announcement of the State Administration of  Taxation on Issues concerning "Beneficial Owners" in Tax Treaties  (hereinafter referred to as the "Announcement").

An "eligible person" means  that the treatment under tax treaties signed between China and the country  (region) of residence of the person is the same as or more preferential than  that enjoyed by the applicant, when the proceeds obtained from China by the  person are dividends.

Offer an opportunity for  applicants, who satisfy certain conditions, though they fail to satisfy the  conditions for "beneficial owners", to enjoy the treatment under  tax treaties

State tax letter [2009] no. 601  article 2

For the determination of  "beneficial owners" status, rather than viewed only from the  technical level or domestic law angle, it shall be analyzed and viewed on the  basis of purposes of the tax treaties (i.e. avoiding double taxation and  preventing tax evasion and omission) and the principle of "substance  over form" and in line with the specific circumstances of the cases. In  general, the following factors are not conductive for the determination of  applicants' status as "beneficial owners":

1. The applicant is obliged to pay  or distribute all or major part (e.g. above 60%) of the proceeds within a  specified time limit (e.g. within 12 months after receiving) to residents of  a third country (region).

2. The applicant has no or hardly  has any other operation activities except the properties or rights from which  the proceeds generate.

3. As for a company applicant and  the like, the applicant's small (few) asset, scale and staff mismatch with  the proceeds.

4. The applicant has no or hardly  has any right to control or dispose, nor does it assume or assumes little  risk on the proceeds or the properties or rights from which the proceeds  generate.

5. The counterparty county  (region) to the tax treaties does not levy tax or grant tax exemption on the  proceeds or levy at an extremely low rate.

6. Besides the loan contract based  on which interests accrue and are paid, the applicant has other similar loan  or deposit contracts in respect of amount, interest rate and execution date  with a third party.

7. Besides the transfer contracts  of copyright, patent or technology based on which loyalties generate or are  paid, the applicant has other transfer contracts in respect of right to use  or ownership of copyright, patent or technology with a third party.

As for proceeds of differing  natures, if it is believed that the applicant does not satisfy the  requirements of Article 1 hereof upon comprehensive analysis on the basis of  the factors said above, the applicant shall not be determined as the  "beneficial owner".

The state administration of  taxation announced article 2 of article 9 of 2018

When the status of residents of a  counterparty who need to enjoy the treatment under the tax treaties  (hereinafter referred to as the "applicants") as "beneficiary  owners" is determined, a comprehensive analysis shall be conducted based  on the factors set out in the present article and in combination with the  actual conditions of specific cases. In general, the following factors are  not conducive to the determination of an applicant's status as a  "beneficial owner":

1. The applicant is obliged to pay  50% or above of the proceeds within 12 months upon receipt of the proceeds to  residents of a third country (region). The obligation includes agreed  obligation and the circumstance where there is no agreed obligation but the  payment fact has been formed.

2. The business activities engaged  in by the applicant do not constitute substantive business activities.  Substantial business activities include substantive manufacturing,  distribution, management and other activities. Whether the business  activities engaged in by the applicant are substantive shall be judged  according to the functions actually performed and the risks assumed by the  applicant.

The substantive investment holding and management  activities engaged in by the applicant may constitute substantive business  activities. Where the applicant engages in the investment holding and management  activities that do not constitute substantive business activities and engages  in other business activities at the same time, if the  other business activities are not significant enough, such business  activities do not constitute substantive business activities.

3. The counterparty county  (region) does not levy tax or grant tax exemption on the proceeds or levy tax  at an extremely low effective rate.

4. Besides the loan contract based  on which the interest accrues and is paid, there are other similar loan or  deposit contracts in respect of amount, interest rate and execution date  between the creditor and a third party.

5. Besides the transfer contract in  respect of copyright, patent or technology based on which the royalties are  generated or paid, there are other transfer contracts in respect of the right  to use or the ownership of copyright, patent or technology between the  applicant and a third party.

Revise the unfavorable factors for  the determination of "beneficial owners" as prescribed in the  Document No.601

The state administration of taxation announced article 5 of  article 9 of 2018

The shareholding ratio required by Articles 3 and 4 hereof shall  reach the stipulated ratio at any time within 12 consecutive months before  the dividends are obtained.

Provide the time limit requirement for the shareholding ratio  set forth

Announcement of the State Administration of Taxation [2015]  No.60 Article 7

proof of identity of  the tax resident issued by the competent tax authority of the counterparty to  the convention after the beginning of the calendar year prior to the filing  of the tax return or withholding declaration

The state administration of taxation announced article 8 of  article 9 of 2018

a tax resident identity certificate shall prove the status as  a tax resident in the current year when the proceeds are obtained or the  previous year.

Specify what materials shall be provided to prove the status as  a "beneficial owner"

3.    Effective date

The Announcement shall apply to matters requiring treatment under tax treaties for the tax liability or the withholding obligation arising on and after April 1, 2018. The Circular of the State Administration of Taxation on How to Understand and Determine the "Beneficial Owners"in Tax Treaties (Guo Shui Han [2009] No.601) and the Announcement of the State Administration of Taxation on the Determination of "Beneficial Owners" in Tax Treaties (Announcement of the State Administration of Taxation[2012] No.30) shall be repealed at the same time.

4.    Summary

In the new announcement, it is easy to see the efforts of thestate in further optimizing the service and management of non-resident enterprise income tax and improving the relevant system and methods of non-resident tax identification. That's what all taxpayers expect.

The 9 announcement related regulations, the ECOVIS Ruide professionalservices team can provide include overall planning, custom solutions, simulation of tax inspection and a series of personalized services,such as have not clear place welcome to inquire, we will provide the most professional solutions, and provide our consistent high-quality service!


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