China SAT Clarifies Beneficial Owner Rules For Tax Treaty Purposes

; posted on
February 8th, 2018

The State Administration of Taxation issued a Bulletin (SAT Gong Gao [2018] No.9) to clarify the recognition of “beneficial owners” for bilateral tax treaty purpose. The Bulletin will enter into force on April 1, 2018, when other two documents regarding recognition and interpretation of beneficial owners cease to be effective simultaneously, that is, Circular No. 601 (GuoShui Han[2009] No.601 SAT) and Bulletin No.30 (Gong Gao[2012] No.30).

Objective of the Bulletin

On the one hand, the Bulletin allows benefits of tax treaty to be granted where abuse intention or consequence is not found, which increase the certainty of tax treaty application with less compliance cost; on the other hand, the Bulletin refers to outcome of BEPS Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) and enhances the criteria for recognising “beneficial owners”, which defends against arrangements with higher abuse risks more effectively.

Highlights of the Bulletin

The Bulletin follows regulations of Circular No. 601 and Bulletin No.30, with partial amendments to some rules. The highlights of the Bulletin can be found as following:

  • Extend the scope of the safe haven rules under Bulletin No.30 to cases where sufficient connection with the resident state can be observed, including the authority of the other contracting state, the resident of the other contracting state which is a listed company therein or an individual. Three scenarios are provided to illustrate the extended scope;
  • Tax payers who meet neither “beneficial owners” standards nor safe haven rules may be entitled to apply for benefit under tax treaty if certain requirements are fulfilled. This applies to tax payers under arrangement with several layers, that is: i); ii) the person directly or indirectly holds 100% of shares of the applicant but is not the resident of the contracting state of the applicant, and this person and interlayer holders are qualified persons;
  • A consecutive 12-month holding period is required for the purpose of applying the above rules;
  • The seven unfavourable factors under Circular No.601 are adjusted into five, without significant changes: i) under the new rule “the applicant has the obligation to pay 50% of consideration received to resident in a third state within 12 months of recipient”, the payment ratio decreases from 60% to 50%, and the “obligation” includes both engaged obligation and unengaged but having paid cases; ii) the new Bulletin integrates three factors under Circular No.601 into one concerned the content and standards of “substantial business operation”, as well as excluded “other business operation but not significant enough” from the scope of “substantial business operation”; iii) other three factors, namely, foreign low-tax factor, back-to-back factor and permission factor is preserved in the Bulletin.
  • Other issues including clarification of holding period/ratio and the concept of “recipient on behalf of a person”, administrative regulation regarding documentation proof, and anti-abuse rules.

Source: SAT 

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