The Conflict And Coordination Between The Domestic Law And Tax Treaties On Nonresidents’ Indirect Transfer Of Shares In Chinese Resident Companies

Nowadays, the Chinese legislators and tax bureaus are using domesticanti-avoidance rules to regulate nonresidents’ indirect transfer of shares in Chineseresident companies, while whether the China-Foreign Tax Treaties impose anyrestrictions on such regulations is improperly ignored. Indeed, besides domestic law,China-Foreign Tax Treaties are another legal source of Chinese international tax law,which should be observed by China. Therefore, the Chinese legislators and taxbureaus should take China-Foreign Tax Treaties into consideration when regulatingnonresidents’ indirect transfer of shares in Chinese resident companies.This article attempts to use the methods of normative analysis, case analysis,classification and induction to analyze (1) whether the domestic law imposed onnonresidents’ indirect transfer of shares in Chinese resident companies, especially thedomestic anti-avoidance rules, conflicts with different types of China-Foreign TaxTreaties;(2) when the conflict may exist, how to avoid the conflict; and (3) when theconflict already exists, how to coordinate the conflict;This article analyzes the nonresidents’ indirect transfer of shares in Chineseresident companies from both the perspective of domestic law and cases. Then howthe two types of China-Foreign Tax Treaties based on OECD and UN Model TaxConventions regulate such transfer respectively are further analyzed, based on whichthe following conclusions are made.(1) Conflict exists: if the nonresident’s resident country signed the tax treaty based on the OECD model, the Chinese domestic anti-avoidance rules and the sourcerule imposed on nonresidents’ indirect transfer of shares in Chinese residentcompanies conflict with the Capital Gain Article of that treaty, which exclusivelydistributes the taxation rights of share transfer to the resident country. Even theanti-avoidance purpose could not justify that taxation as the interpretation of tax treatyshould firstly rely on the specific articles, rather than the purpose. Unless taxavoidance is so tremendous being the exception of observing treaty obligations orbeing the national emergency, or the anti-avoidance rules would develop to beinternational customary law in the future, China could impose tax on nonresidents’indirect transfer of shares.(2) Conflict may exist: if the nonresident’s resident country signed the tax treatybased on the UN model, and there is no article empowering the contracting state toapply the domestic anti-avoidance rules when such rule conflicts with the tax treaty,whether domestic anti-avoidance rules are allowed to apply depends on how tointerpret “transfer” in the Capital Gain Article. Namely, whether the conflict existscannot be determined based on the specific stipulations of domestic law and treaty. Asthe treaty gives no interpretation of “transfer”, domestic laws and regulations could beused in the interpretation. In accordance with Chinese domestic law, when there is taxavoidance structure, China could redefine the indirect transfer as direct transfer basedon domestic anti-avoidance laws and regulations, and thus impose tax based on thesource rule of PRC Enterprise Income Tax Law. However, since the domesticinterpretation involves anti-avoidance rules, whether domestic anti-avoidance rulesare allowed to interpret the treaty depends on the general attitude whether domesticanti-avoidance rules are in conflict with tax treaty. According to the theory of theapplication of tax treaty, the purpose and reality of anti-avoidance, China should stickto the general attitude that there is no conflict when the conflict cannot be determinedbased on the specific stipulations of domestic law and treaty, then domesticanti-avoidance rules could be used to guard our tax base and national interests, andthe tax treaty obligation is also observed.（3）No conflict exists: if the nonresident’s resident country signed the tax treatybased on the UN model, and there is an article empowering the contracting state toapply the domestic anti-avoidance rules when such rule conflicts with the tax treaty,using domestic anti-avoidance rules to tax nonresidents’ indirect transfer of shares in Chinese resident companies totally complies with the treaty obligation.In addition, in order to protect the legal rights of taxpayer, the function oftaxpayer should be improved in the mutual agreement procedure of the tax treaty.