The Determination Of Reasonable Commercial Objective On Nonresidents' Indirect Transfer Of Equity

The announcement of several issues relating to enterprise income tax on transfer of assets between non-resident enterprises on February 3rd,2015(hereinafter referred to as"announcement No.7^th")is the first time that the state administration of taxation has put forward the system judgment standard of the judgment of commercial purposes.The announcement of state administration of taxation on issues relating to with income tax of non-residents'enterprises on Dec.1st,2017(hereinafter referred to as“announcement No.37^th”)explained in detail the vague contents of the announcement No.7^th.However,the announcement 37^th is still vague on the description of the reasons for reasonable commercial purposes in announcement No.7^th.Even so,the evaluation of business objectives requires strong technical skills and is highly subjective.Firstly,even though"announcement No.7^th"regulates the transfer of shares of Non-resident Enterprises on certain levels,but it is still vague.Secondly,it is not easy for taxpayers to prove that a transaction has reasonable commercial objectives.In several cases of indirect transfer of equity in non-resident enterprises,the tax authorities have denied the significance of the existence of the catheter companies,and finally determined that the transaction didn't have reasonable commercial objectives.In practice,the tax authorities have a large discretion in the existence of reasonable commercial objectives for the indirect transfer of equity transactions by Non-resident Enterprises,but the determination still has certain difficulty.The Children's investment Master Fund?hereinafter referred to as"Children's investment Fund case"?and the Hangzhou Xi hu District State Taxation Administration levy a case after administrative reconsideration,first trial,second trial,retrial procedure,finally was found to misuse the organization form in order to indirect transfer Chinese resident enterprise shareholding,and the transfer didn't have a reasonable commercial objective,the existence of an offshore holding company that is used as a tax arrangement was denied.After administrative and judicial proceedings,the final Indian Supreme Court finally ruled India's HK International and Record Telecom Co.,Ltd.Vodafone International Holdings case?hereinafter referred to as"Vodafone case"?.The result was that the Indian tax authorities have no right to tax the equity transactions.Generally speaking,China's current laws and regulations about"reasonable commercial purposes"is not practical.Tax authorities and courts have large discretionary power to affect the certainty of the taxpayer's business activities.This paper first introduces the Children investment Fund case and Vodafone case,analyzes the controversial of the cases,the problem of tax jurisdiction and the determination of reasonable commercial objective,then studies the determination standard of"reasonable commercial objective"between Anglo-American law system countries and civil law countries.At last the paper provides suggestions on better perfection of"general anti-tax avoidance rules"and"reasonable commercial purposes".This paper probes into the difficulties in the practical application of the provisions of"reasonable commercial objective"in China's tax laws and regulations,and finally raises suggestions on solving the relevant problems.