Research On Tax-avoidance And Anti-tax-avoidance Of China’s Non-residential Enterprises Indirect Equity Transfer

Ever since the reform and opening up of China, its economy has maintained a rapid growth for a long time. The dividends of economic development and some other considerable portion of wealth have been accumulated into the assets of real estates and equities. And such a huge amount of capital appreciation has constituted a significant cross-border tax base of our country. Under the general provisions of China’s “Enterprise Income Tax Law” and its implementation regulations, as to the incomes from the equity investment assets, it shall be recognized in terms of where the enterprise accepting the equity investment is located. Thus, the incomes from a direct transfer of equity assets by non-resident enterprises shall be levied tax while the incomes from a indirect transfer of equity assets will not be taxed. Hence, in order to avoid corporate income tax obligation in China, some foreign taxpayers attempt to pack those direct transfer of equity assets into indirect transfer. Regarding this problem, the State Administration of Taxation issued “Notice of the State Administration of Taxation on Strengthening the Administration of Enterprise Income Tax on Non-resident Enterprises’ Equity Transfer Income” in 2009, which proposed the corresponding anti-avoidance measures. Since then, the tax authorities have carried out a number of anti-avoidance case investigation and adjustment works on the basis of the above document and other general anti-avoidance rules. However, with the economic and social development, the provisions of the document can no longer meet the requirements of managing the revenue from cross-border sources. Based on the summery of previous experience and problems, the State Administration of Taxation has released a new bulletin “Notice of certain problems regarding the corporate income tax on the indirect transfer of property” lately, which provides specific provisions on the applicable range of general anti-avoidance rules, determining factors of reasonable business purposes, tax obligations and legal liabilities. This bulletin makes the relevant tax administration framework more standardized and comprehensive. It strengthens revenue management of cross-border tax sources by combating international tax evasion while promotes tax compliance by further enhancing policy certainty. However the document is very new, the theoretical research thus is surely limited. This essay attempts to analyze the feasibility and examples of such tax avoidance arrangement through indirect transfer of equity by non-resident enterprises, and clear anti-avoidance’s proper position, methods and rules by drawing lessons from international legislations and practice experiences, to achieve the goal of doing some useful work for anti-tax-avoidance of indirect transfer of equity in China.Except the preface and conclusion, this article is divided into 3 chapters:ChapterⅠfirst elaborates the concept of indirect equity transfer by non-resident enterprises and clarifies the relationship between the indirect equity transfer and tax avoidance arrangement. Based on this, it then analyzes the feasibility and examples of such tax avoidance arrangement through indirect transfer of equity by non-resident enterprises. By doing this, it lays the groundwork for the following analysis of the regulating rules of indirect equity transfer by non-resident enterprises.ChapterⅡexplores the regulating rules around the world of the indirect equity transfer of non-resident enterprises, and specifically discusses various countries’ legislative, judicial or tax practices, which are the result of absorbing international special anti-avoidance rules or using general anti-avoidance rules, that regulate the indirect equity transfer by non-resident enterprises. The evaluation of these practices lays the foundation of the following analysis of China’s regulating rules of indirect equity transfer by non-resident enterprises.ChapterⅢ first reviews the newest China’s tax provisions regulating indirect equity transfer of non-resident enterprises and analyzes some most important issues, such as “Reasonable Business Purpose” and the relevant measures and liabilities. Based on the above, it then puts forward some other anti-tax-avoidance problems and gives corresponding suggestions on the improvement against these problems.