On 29 June 2012 the State Administration of Taxation (“SAT”) issued the Announcement regarding the Recognition of “Beneficial Ownership” under Tax Treaties (“Announcement 30”) (国家税务总局关于认定税收协定中”受益所有人”的公告国家税务总局公告2012年第30号). Announcement 30 serves to clarify how beneficial ownership is determined for the purposes of enjoying PRC tax treaty benefits in furtherance to SAT Circular 601 on the Interpretation and Determination of “Beneficial Ownership” under Tax Treaties, which provided initial guidance on when the resident of a tax treaty jurisdiction would be deemed the beneficial owner of particular items of income.
Through a number of tax circulars issued in that period, SAT sought to ensure that parties enjoying tax treaty benefits had a real connection to the treaty jurisdiction and were not creating artificial tax efficient structures simply to enjoy tax treaty benefits. The tests applied under those circulars required the companies to demonstrate a real connection and substantial presence in the relevant treaty jurisdiction. The focus was on substance over form. Mere registration in a jurisdiction was not sufficient to permit the enjoyment of treaty benefits as the beneficial owner of the relevant income. Window or conduit companies were not eligible for such benefits. SAT was attempting to restrict treaty shopping.
Scope of Application
In furtherance of these efforts, Announcement 30 further clarifies how beneficial ownership is determined for tax treaty purposes and establishes a safe harbour for dividend income in certain circumstances. It introduces a number of important concepts and that should potentially make it easier to enjoy treaty benefits.
Announcement 30 stresses the need to look at the totality of the circumstances in assessing beneficial ownership. Circular 601 set out a number of adverse factors that may indicate the absence of beneficial ownership. Announcement 30 provides that having or lacking one of those adverse factors should not be determinative as to whether a party would be deemed the beneficial owner of the income. The full situation must be reviewed. This may make it easier to obtain a positive assessment for non-operating companies. The criteria set out in Circular 601 focused on the attributes of industrial operating companies.
Listed Company Safe Harbour
Announcement 30 creates a safe harbour for dividends received by publicly listed companies that are tax resident in a treaty jurisdiction. This safe harbour also applies to the wholly owned subsidiaries of such listed companies. In such cases, there is no need for the tax authorities to review factors to determine whether beneficial ownership exists within the treaty jurisdiction with respect to dividend income. This safe harbour does not appear to apply if there is any intermediate third party in the ownership chain that is not in a treaty jurisdiction. This safe harbour applies only to dividends and not to other types of income.
Agents and Intermediates
The authorities are also now authorized to look through any agents and intermediates that receive funds to determine whether treaty benefits should be applicable. A collection agent in non-treaty jurisdiction will not preclude a beneficial owner in a tax treaty jurisdiction from receiving the benefits of the tax treaty. The authority will instead look at location of the beneficial owner of the income. The status of the payment agent will not be the end of the story. Announcement 30 provides a declaration form for agents that must be used in determining the beneficial ownership of income derived from China. The agent and the actual beneficial owner must be identified in the declaration. This should also facilitate qualification for tax treaty benefits.
Announcement 30 also gives the tax authorities the right to revoke the tax treaty benefits of entities that have already qualified as beneficial owners if it is subsequently determined that incorrect information was submitted to obtain beneficial owner status. SAT can review prior tax treatment.
The clarifications contained in Announcement 30 apply to all forms of income received from the PRC, but the listed company safe harbours are only applicable to dividend income. Announcement 30 should be helpful in determining the availability of tax treaty benefits.