China alert - Issue 23, July 2011
As outlined in China alert 17, the Shenzhen Local Tax Bureau (Shenzhen LTB) was recently reported to have collected tax of RMB13.68m from the indirect disposal of shares in a Chinese enterprise by a non-resident individual.
The Corporate Income Tax (CIT) Law contains a general anti-avoidance rule (GAAR) which may be used in cases of perceived abuse of organisational forms and pursuant to Circular 698, to re-characterise an offshore indirect transfer as a direct disposal of the underlying equity interest in the Chinese company by a non-resident disposer, allowing the gain to be subject to Chinese tax. While the Individual Income Tax (IIT) Law prima facie does not contain an equivalent GAAR provision, the actions of the Shenzhen LTB had raised the question as to whether the application of the GAAR had been somehow extended to non-resident individual disposers. Insofar as any application of the GAAR requires the approval of the State Administration of Taxation (SAT), it was questioned whether the imposition of tax in this case indicated a change of policy by the SAT.