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What is Notice 698? From where does this come and where can I find out more about it? (Webinar Attendee Question)

The following question was asked by an attendee at a recent Proformative China M&A, Tax and Structure webinar: In brief, what is Notice 698?  From where does this come (where in the China legal or business codes) and where can I find out more about it?

Answers

Jinghua Liu
Title: Special Counsel
Company: Baker & McKenzie
(Special Counsel, Baker & McKenzie) |

The full name of Notice 698 is the "Notice on Strengthening the Administration of Enterprise Income Tax on Income from Transfers of Equity Interests by Non-resident Enterprises", Guoshuihan [2009] No. 698, issued by the State Administration of Taxation (“SAT”) on 10 December 2009. Baker has wrote articles about Notice 698, please find links to the article. (http://www.bakermckenzie.com/ALChinaNotice698DeathOffshoreHoldingFeb10/)

As background, capital gains derived from the transfer of PRC resident enterprises by foreign entities are subject to a 10% withholding income tax (this may be reduced by an applicable tax treaty, although there are few such treaties with China). A tax notice issued at the end of last year, Guo Shui Han [2009] No. 698 ("Notice 698"), requires foreign entities to disclose indirect transfers of PRC resident enterprises to the PRC tax authorities when the offshore holding company whose shares are transferred is located in a low tax jurisdiction (i.e., the headline tax rate is lower than 12.5%) or in a jurisdiction that exempts income tax on foreign-sourced income. After reporting, the PRC tax authorities will then determine whether the existence of the offshore holding company should be disregarded because of a lack of "reasonable commercial purpose". If the offshore holding company is disregarded, the tax authorities will deem the transfer of its shares as a direct transfer of the Chinese resident enterprise, with the result that the capital gain associated with the offshore transaction will be subject to PRC income tax.

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