China Levies Huge Tax Bill on Foreign-Owned, Offshore Transaction
China’s State Administration of Taxation has levied its largest enterprise income tax on a nonresident taxpayer in China. The government-run China Taxation News reported that the SAT collected RMB2.19 billion (US$332 million) in EIT from an anonymous British mobile phone company in connection with the sale of its shares in a Chinese-controlled company. The company is thought to be Vodafone, who in September sold its 3.2 percent stake in China’s largest wireless operator, China Mobile, for US$6.5 billion.
Foreign shareholders and potential investors should now consider the tax implications that arise from the affirmation of offshore-listed companies as tax-resident enterprises of China. When Chinese-controlled, offshore-listed companies are tax resident in Hong Kong, foreign shareholders are not required to pay tax on their dividends and income from transfers of shareholding originating from those companies. However, this changes if such companies come to be regarded as tax resident in China. In that event, dividends and income from transfers of shareholdings in the companies will be deemed to be income derived from China and be subjected to China’s EIT at the nonresident rate of 10 percent.
Foreign shareholders and potential foreign investors should closely monitor the SAT’s progress in its initiative to combat tax avoidance and construct suitable investment structures before investing in Chinese-controlled, offshore-listed companies. Tax treaties with China and their own countries’ tax credit policies should also be considered carefully.