1. Discussion： Singapore case
Bco in China is wholly owned by Aco in Singapore. Aco in Singapore is wholly owned by Dco in Singapore. Dco transfer the equity of Aco to Cco in China. Will the capital gains earned by Dco subject to China’s Enterprise Income Tax?
Dr.DU Li, Department of Public Economics, Fudan University
01:37:05

2. Discussion： Singapore case
Transfer of
Shares of A
Cco
Dco
Bco
holding
holding
Equity
investment
Aco
China
Singapore

3. Discussion： Singapore case
According to the source rule in China’s EIT law, for income from transfer of property, the source is determined by the location of the invested enterprises in case of transfer of equity.
In this case, Dco is a non-resident enterprise without establishment in China , it will be subject to China’s EIT only for China-source income. Since the invested enterprise Aco is located in Singapore, the capital gains derived by Dco will not be subject to China’s EIT if no anti-avoidance rule is applicable.
01:37:05
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

4. Discussion： Singapore case
But according to GAAR, for any arrangement which has no justifiable business reason and lead to lower tax burden , the tax authority can disregard the arrangement and levy tax according to substance of the transaction.
In this case, Dco needs to pay tax to PRC tax authority for the capital gains if Aco is a shell company.
China issued circular [2009] 698 to clarify the tax issue for indirect transfer of the equity of a Chinese resident enterprise or the immovable property in the PRC .
01:37:05
Dr.DU Li,Department of Pulbic Economics,Fudan University

5. General Anti-avoidance Rules (GAAR)
The tax authority is authorized to make adjustments to arrangements that can result in a reduction of tax payable and are made without any justifiable business reason.
01:37:05
Dr.DU Li,Depertment of Pulbic Economics,Fudan University

6. Key points of circular [2009] 698
Features of shell company
Only registered in the country without substantive business activities such as manufacturing, sales and marketing, management, etc.
Nil or few employees
The properties of the company mainly consists of the investment in PRC resident enterprises
Main income is the dividends from Chinese enterprises
Pay nil or a little income tax in its home country
Share transfer agreement clearly states, or transferee expresses, that the acquisition target is the equity of the PRC resident enterprise or the immovable property in PRC
01:37:05
Dr.DU Li, Department of Public Economics, Fudan University