Extraterritorial enforcement of corporate income tax
A tax circular which seeks to strengthen the administration of tax on income derived from equity transfer may have a profound impact on non-resident investors using offshore vehicles. But the authorities have some legal hurdles to clear
Issue: February 2010
Keywords (click to search):
tax
EIT
enterprise income tax
corporate income tax
offshore
equity transfer
Under the current Implementing Regulations for the PRC Enterprise Income Tax Law, effective from January 1 2008, a general anti-avoidance rule (GAAR) was introduced such that arrangements without “reasonable commercial purpose” causing a reduction of taxable gross income will be adjusted. The detailed Implementation Regulations went on further to define this “reasonable commercial purpose” as any arrangement for the primary purpose of the reduction, exemption or deferral of Enterprise Income Tax (EIT) payments.
In the past two years, the State Administration of Taxation (SAT) has issued a number of circulars imposing various tax administrative measures and policies on non-tax-resident enterprises (Non-TRE) with China investments (see Figure 1).
Under Circular 2, the Administration Measure for Special Tax Adjustment issued on January 8 2009 the Chinese tax authorities are empowered to impose adjustments by using various measures. The SAT can also apply GAAR and investigate the taxpayer. While...
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