China: Interpretation on Issues Concerning “Beneficial Owners” in Tax Treaties

Main content of the Notice 

In accordance with the Notice of the State Administration of Taxation on the issuance of the “Administrative Measures on the Treatment under Tax Treaties for Non-resident Taxpayers” (Notice of the State Administration of Taxation Document [2015] No. 60, hereinafter referred to as “Notice No. 60”), any resident of the other party to any tax treaty who claims any treatment under the treaty (the Applicant) shall submit relevant evidence to the tax authority. 

(I) Expansion of the scope of safe harbor provided for in Notice No. 30 

Article 3 of Notice No. 30 provides that, when certain conditions are met, an Applicant is directly determined to have the capacity of a “beneficial owner”. A safe harbor is provided for the determination of the capacity of “beneficial owners”, without comprehensive analysis. In Article 4 of the Notice, restrictions on the safe harbor are relaxed, and the scope of safe harbor is expanded. 

(II) Opportunity to enjoy the treatment under tax treaties are given to Applicants who do not meet the conditions for “beneficial owners” in spite of meeting certain criteria

As provided for in Document No. 601 and Notice No. 30, if an Applicant neither meets the conditions for “beneficial owners” nor meets that for the safe harbor, the Applicant may not claim any treatment under any tax treaty in respect of the earnings it derives from China. 

Article 3 of the Notice provides that, where the earnings derived by an Applicant are dividends, it shall be deemed that the Applicant has the capacity of a “beneficial owner” if it conforms to the provisions hereof. Two circumstances are provided for in Paragraph 1, Article 3 of the Notice. Under the circumstances set forth in Item (I), Paragraph 1, Article 3 of the Notice, if any person meeting the conditions for a “beneficial owner” is a resident in the resident country (region) where any Applicant belongs to, there are no requirements for the intermediary holding shares indirectly; whereas under the circumstances set forth in Item (II), Paragraph 1, Article 3 of the Notice, if any person meeting the conditions for a “beneficial owner” is not a resident in the resident country (region) where any Applicant belongs to, such person and the intermediary holding shares indirectly shall be persons meeting certain requirements.

Different from the rules on safe harbor provided for in Article 4 of the Notice, the Applicant may not be determined directly to be a “beneficial owner” under circumstances set forth in this Article, and comprehensive analysis shall be conducted to determine whether the person holding 100% shares of the Applicant directly or indirectly have the capacity of a “beneficial owner” based on the factors listed in Article 2 of the Notice. 

(III) Time restriction on the shareholding percentage in Articles 3 and 4 of the Notice

To prevent any scheduled time point for obtaining dividends to reach the shareholding percentage as required in Articles 3 and 4 of the Notice, Article 5 of the Notice specifies that the shareholding percentage as required in Articles 3 and 4 of the Notice shall be maintained at all times within 12 consecutive months prior to obtaining dividends. 

(IV) Modification to the adverse factors in determination of the capacity of “beneficial owners” provided for in Document No. 601 

Of the seven adverse factors in determination of the capacity of “beneficial owners” as listed in Article 2 of Document No. 601, two are modified and another two are deleted in the Notice: 

1. Modification to the first adverse factor in Article 2 of Document No. 601 As stated in Article 2 of the Notice, the first adverse factor in Article 2 of Document No. 601 is modified as: “the Applicant shall have the obligation to pay, within 12 months of receipt of the earnings, not less than 50% thereof to a third country (region) resident, in which case the term “have the obligation” shall include circumstances under which the obligation has been agreed to or the payment has become a fact although no provisions have been made on the obligation.” 

2. Modification to the second adverse factor and deletion of the third and fourth adverse factors in Article 2 of Document No. 601 

As stated in Article 2 of the Notice, the second adverse factor in Article 2 of Document No. 601 is modified as: 

“The operating activities in which the Applicant is engaged do not constitute substantive operating activities. Substantive operating activities shall include manufacture, distribution, management and other activities of a substantive nature. Whether any operating activity in which any Applicant is engaged is of a substantive nature shall be determined based on the functions it actually performs and the risks involved therein. 

The investment and management activities of a substantive nature in which any Applicant is engaged in as a controlling shareholder may constitute substantive operating activities. Where the investment and management activities in which any Applicant is engaged in as a controlling shareholder do not constitute substantive operating activities, and the Applicant is concurrently engaged in other operating activities, such other operating activities shall not constitute substantive operating activities to the extent that they are not prominent enough.”

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