top 3 new prc tax challenges & opportunities faced by hong...

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Top 3 new PRC tax challenges & opportunities faced by Hong Kong companies with business in China

HKTDC World SME Expo 2009 HKTDC World SME Expo 2009 20092009年年1111月月2727日日

Presenter: Nicola Tang, Senior Manager, Tax & China Business Advisory Service

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2PricewaterhouseCoopers

Agenda

1. Claiming benefits under double tax treaties

2. Indirect transfer of Chinese equity

3. Secondment = Service permanent establishment (“PE”)?


Business interaction between Hong Kong and Mainland

Hong KongHong Kong

• Capital in/(out)flow

• People in/(out)flow

• Goods / service in/(out)flow


Profit alignment ？- Transfer pricing policy

Investment holding structure/ cash

repatriation strategy？Dividend / interest / royalty / capital gain on transfer of

Chinese equity

Claiming treaty benefits?-Build substance

-Tax residency certificate- Approval and record filing

requirement

Service agreement /secondment ？

- 183 days treaty protection

Hong Kong Tax

implications?


Part IClaiming benefits under double tax treaties


Major provisions in a typical Double Taxation Agreement (“DTA”)

• Tax residency• Permanent Establishment (“PE”)• Business profits• Dividends• Interest• Royalties• Capital gains• Income from employment• Methods for elimination of double taxation • Exchange of information• Miscellaneous…Note: Special provision to Mainland-HK DTA : Domestic GAAR


22/9/2008

Circular 801“CIT returns for

Non-TRE”

16/3/2007

new CIT Law“The concept of

Non-TRE”

6/11/2008

Circular 897“Dividends paid

by H share”

24/11/2008

Circular 955“Interest

sourced from China”

More to come

RO/Indirect Equity Transfer/

Secondment/Deemed Profit Rates

for PE

8/1/2009

Circular 2“Special tax

adjustments”

Decree 19“Contracted projects and

service provision”

20/1/2009

Circular 3“Passive income”

9/1/2009

Circular 6“Annual CIT filing

for Non-TRE”

22/1/200923/1/2009

Circular 47“Dividends, profits and interest paid to

QFIIs”

22/2/2009

Circular 81“Treaty benefit for

China sourced dividends”

Circular 394“WHT on dividends

to Non-TRE shareholders”

24/7/2009

Circular 124“Claiming treaty

benefits”

24/8/2009 14/9/2009

Circular 507“Treaty benefit for royalties”

27/10/2009

Circular 601“Determination of

beneficial ownership for treaty benefit”

5/12/2008

Circular 114 “Related

party transactions”

Evolution of policies for non-resident tax administration


Key features of Circular 124–“Approval-application” and “Record-filing”

Overview• Applicable to both non-tax resident enterprises and individuals.• Not going through “Approval-application” and “Record-filing” administrative

procedures No tax treaty benefits granted.• Effective day : 1st of October 2009.

Passive income – “Approval-application” procedure• Dividends, interest, royalties, and capital gains• Authorised-approval tax bureau (“ATB”)

Active income – “Record-filing” procedure• Permanent establishment (“PE”), business profits, independent personal

services, and dependent personal services• Filing with in-charge tax bureau


Intention of Chinese tax authorities

• Unify and tighten up administration for claiming treaty benefits• Combat treaty shopping and abuse by reference to:

- Tax resident - Beneficial ownership (control)- Limitation of benefits- Commercial purpose- Substance

• Collect statistics of China’s tax revenue given up• What is the response of Competent Authority of other jurisdictions


Challenge from Circular 124

• Denial of tax treaty benefits if not going through approval-application or record-filing

• Much more administrative work in China as well as in Home jurisdictions than previous practice

• Higher compliance standard• Sensitive information to be disclosed in the forms• Local practice to come

What to do?

• Are you coming from a treaty jurisdiction?• What income do you derive from China?• Is tax reduction or exemption available under the treaty?• Are you the “genuine” tax resident of your jurisdiction?• Are you the beneficial owner of the China-source income?• Do you have substance in Home jurisdiction?


Part IIIndirect transfer of Chinese equity


Typical Chinese investment holding structure

A(Ultimate Hold Co)

B(SPV)

C(China investee)

Ex-China

China

• Source rule in CIT law

• GAAR – “main purpose”

Sales proceed

D

Own


Chongqing case

Before the acquisition

Singapore Co

Target

PRC Co B PRC Co A

Singapore

China

Payment for acquiring shares in Target

After the acquisition

Singapore Co

Target

PRC Co B PRC Co A

Singapore

China

Concerns on implication of Chongqing case

• Substance over Form!• Isolated case?• SAT position?( anti-avoidance?)• How to mitigate the risk?


Latest development

A(Ultimate Hold Co)

B(SPV)

C(Chinese investee)

Ex-China

China

• Old version vs new version

• GAAR ->> Source Rule

• Disclosure requirement

->> Substance

SAT Draft Policy:


Part IIISecondment = Service PE ?


Typical Secondment Arrangement

Home entity

Host entity(China)

Hong Kong

ChinaDocumentation

Reimbursement of remuneration

MPF / other pension schemes

Shared administrationcharges

$$

$$

$$

$$


Sample survey on secondment arrangement & PE (Shanghai)


Typical secondment arrangement

Home entity

Host entity(China)

Hong Kong

ChinaDocumentation

Reimbursement of remuneration

MPF / other pension schemes

Shared administrationcharges$$

$$

$$

$$

Concerns of secondment arrangement

• Recharge of remuneration and shared administration charges (profit?)

=> PE in China?

• No recharge => tax deductible in HK?

• Cash repatriation from China => pay tax in the first place?


What’s next

What’s to expect• SAT preparing guidelines for assessment • Local level pending approval for remittance

Suggestions 1. Substantiation of secondment arrangement with proper documentation (with

supports from Home Co.)2. Good communication with local level in-charge tax bureaus3. Consistent strategy for group entities throughout the country

Is it the end of the challenge? Are there other risks?


How to build an optimal company structure?

How to design the most efficient operation model?

How to implement an effective initial financing arrangement?

How to arrange for the intellectual properties?

How to meet the financing needs during the stage of business growth via the most optimal tax arrangement?

How to control and minimize tax exposures legally and efficiently as well as optimize tax cost?

How to make use of preferential tax treatment effectively?

How to regulate the related-party transactions and optimize the transfer pricing arrangement?

How to refine the group structure, operation flow and related party transactions during the expansion process?

How to optimize the financing model of outbound investment in order to maximize the investment return?

How to obtain the best international trading solutions?

How to obtain the best merger and acquisitions tax solutions?

Stage 1: Planning Stage 3: Maturity 扩张阶段Stage 2: Growth

• Preliminary planning on business model and holding structure

• Research and development on product and technology

• Initial financing

• Continuous refinement on technology

• Expand production scale• Broaden market channels

and establish your brand• Increase of capital need

• Continuous development and stabilize your market position

• Enter new business market

• Look for IPO

How to optimize the private wealth management for enterprise founders?

How to motivate employees efficiently?

How to clear the tax obstacles before the listing?

How to meet the tax regulatory requirement of overseas capital market?

How to make provision for deferred tax and uncertain tax positions according to the accounting standards of the place of listing?

Stage 4: Expansion

• Vertical/horizontal expansion

• Restructuring, merger and acquisition

• Outbound investment

We stay close with our clients through providing ongoing tax advice for each stage of their business development


Our contacts

Cathy Jiang, Partner – Tax & China Business Advisory ServicesPricewaterhouseCoopers Hong KongTel：+852 2289 5659, Email：[email protected]

Nicola Tang, Senior Manager – Tax & China Business Advisory ServicesPricewaterhouseCoopers Hong KongTel：+852 2289 5873, Email：[email protected]

P w C© 2009 PricewaterhouseCoopers. All rights reserved. "PricewaterhouseCoopers" refers to the Hong Kong firm of PricewaterhouseCoopers or, as the context requires, the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US).

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The information contained in this presentation is of a general nature only. It is not meant to be comprehensive and does not constitute legal or tax advice. PricewaterhouseCoopers Limited ("PwC") has no obligation to update the information as law and practice change. The application and impact of laws can vary widely based on the specific facts involved. No reader should act or refrain from acting on the basis of any material contained in this presentation without obtaining advice specific to their circumstances from their usual PwC client service team or their other advisers.

The materials contained in this presentation were assembled on 30 November 2009 and were based on the law enforceable and information available at that time.

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