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Approved Changes (3)

China

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China Expands Rules on Indirect Transfers of Chinese Assets

On 6 February 2015, China's State Administration of Taxation (SAT) issued Public Notice 7 (2015), which covers the taxation of indirect transfers of assets by non-resident enterprises. Public Notice 7 expands upon and generally replaces the provisions for taxing indirect transfer of China resident enterprises as introduced in Circular 698 (2009), and SAT Bulletin 24 (2011). Key aspects of Notice 7 are summarized as follows.

Recharacterization and Scope of Assets

An indirect transfer of assets will be recharacterized as a direct transfer for tax purposes if the arrangement does not have a reasonable commercial purpose and avoids Chinese Enterprise Income Tax. Assets are defined as:

  • Assets attributed to an establishment in China (movable property)
  • Immovable property situated in China
  • Shares in a China resident company

An indirect transfer is defined as a transfer of shares or equity-like interests in a non-resident intermediary enterprise that directly or indirectly holds Chinese taxable assets.

Reasonable Commercial Purpose

Notice 7 includes seven factors to be considered in determining if an indirect transfer transaction has a reasonable commercial purpose:

  • Whether the equity value of the nonresident intermediary enterprise is derived directly or indirectly mainly from Chinese taxable assets,
  • Whether the nonresident intermediary enterprise's assets consist directly or indirectly mainly of investment in China, or whether its income is directly or indirectly mainly from a Chinese source,
  • Whether the functions and risks undertaken by the nonresident intermediary enterprise and its subsidiaries directly or indirectly holding the Chinese taxable assets can justify the economic substance of the organizational structure,
  • The length of time the shareholders, the business model, and the relevant organizational structure of the nonresident intermediary enterprise have existed,
  • Whether foreign income tax applies to the income from the indirect transfer,
  • Whether the indirect investment/transfer could have been made through a direct investment/transfer, and
  • Whether an income tax treaty or other arrangement applies to the indirect transfer

In addition to the seven factors to be considered, Notice 7 introduces four conditions that, if all are met, will result in an indirect transfer being deemed to not have a reasonable commercial purpose unless the safe harbor rules apply (below):

  • 75% or more of the equity value of the nonresident intermediary enterprise is directly or indirectly derived from Chinese taxable assets,
  • 90% or more of the nonresident intermediary enterprise's total assets (excluding cash) directly or indirectly consist of investments in China at any time in the 12 months prior to the indirect transfer, or 90% or more of its income is directly or indirectly derived from China within the 12 months prior to the indirect transfer,
  • The nonresident intermediary enterprise and its subsidiaries directly or indirectly holding the Chinese taxable assets do not perform sufficient functions or assume sufficient risk to prove their economic substance, and
  • The foreign tax payable on the gain resulting from the indirect transfer of assets is less than what the Chinese tax payable would be if transferred directly

Safe Harbor

Notice 7 introduces two situations where the indirect transfer rules will not apply, including:

  • When a non-resident derives income from the indirect transfer of Chinese taxable assets through the acquisition and sale of shares of a foreign enterprise listed on a public exchange
  • When the provisions of an applicable tax treaty or other arrangements would have resulted in an exemption if the transaction was a direct transfer

Also introduced in Notice 7 is a safe harbor for group reorganizations. A qualifying internal reorganization involving an indirect transfer of Chinese assets will be deemed to have reasonable commercial purpose if the following three conditions are met:

  • The transferor and transferee are qualified related parties, meaning one party directly or indirectly owns 80% or more of the shares of the other, or a third party directly or indirectly owns 80% or more of the shares of both - however, the ownership requirement is 100% if 50% or more of the equity interest value of the of transferred non-resident intermediary enterprise is derived directly or indirectly from immovable assets in China,
  • The Chinese tax payable on a possible subsequent indirect transfer of the same Chinese taxable assets must not be lower than what the tax payable would have been on the first transfer in the same or similar circumstances, and
  • Consideration paid by the transferee must consist entirely of its own shares, or shares of the company controlling the transferee (excluding shares of companies listed on a public exchange)

Reporting Obligations and Penalties

The mandatory reporting obligations that were included in Circular 698 are made voluntary by Notice 7. However, the tax authorities may now request information on a transaction from either party to a transaction, as well as the China resident enterprise and any person involved in planning the transaction. Under Circular 698, only the transferor was required to submit information.

Although now voluntary, if an indirect transfer results in a China tax obligation and is not reported, higher late payment interest penalties will apply and withholding agents will also be subject to penalties.

Required documents include:

  • Share transfer agreement,
  • Organization charts prior to the transfer an after,
  • Financial statements for the two previous fiscal years of the nonresident intermediary enterprise and its subsidiaries directly or indirectly holding the Chinese taxable assets, and
  • A statement detailing why the indirect transfer should not be recharacterized as a direct transfer

If required documents are not submitted within 30 days of signing the transaction agreement, the late payment interest penalty will be the basic loan rate published by the People's Bank of China plus 5%. If submitted within 30 days, the basic loan rate applies.

If the withholding agent fails to withhold tax, a penalty of 50% to 300% of the tax not withheld may be imposed.  

Method and Timing of Taxation

When an indirect transfer is recharacterized as a direct transfer, the taxation of the capital gain will depend on whether attributed to an establishment or not. If effectively connected to the transferor's establishment or place of business in China, the gain will be included in taxable income of the establishment or place of business. If not effectively connected with an establishment or place of business, the gain will be subject to withholding tax. In either case, the tax liability arises in the year the share transfer agreement has become effective and the change of ownership completed.

As with previous rules, final assessments must be approved by the SAT.

Effective Date

Public Notice 7 is dated 3 February 2015, and applies from that date. The rules also apply for pending cases of indirect transfers prior to that date if not yet settled by the Chinese tax authorities.

Netherlands

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The Netherlands Publishes New Regulations on Withholding Tax Certificates

On 3 February 2015, new Dutch regulations were issued concerning withholding tax certificates for obtaining a reduction or exemption of Dutch dividend withholding tax provided for in an applicable tax treaty.

The main change is a four-year limit on the validity of both new and existing certificates. For already approved certificates, the period of validity begins 4 February 2014. In addition, new applications must now be submitted to the Arnhem office of the Dutch Tax and Customs Administration, instead of the local tax office where the taxpayer is registered.

United Kingdom

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UK Rates and Thresholds for PAYE Tax, National Insurance Contributions and Other Benefits Published

The UK HMRC has published the rates and thresholds for PAYE tax (individual income tax) for the tax year beginning 6 April 2015. PAYE tax rates and threshold are as follows:

  • up to GBP 31,785 - 20%
  • GBP 31,786 up to 150,000 - 40%
  • over GBP 150,000 - 45%

The basic personal allowance is increased from GBP 10,000 to GBP 10,600.

Also published are the rates and thresholds for National Insurance contributions, which vary based on the category of the employee. The rates and thresholds for general employees are as follows:

Employee Contributions

General employees not in contracted-out pension schemes (Category A)

  • up to GBP 8,060 - 0%
  • GBP 8,061 up to 40,040 - 12%
  • GBP 40,041 up to 42,385 - 12%
  • over GBP 42,385 - 2%

General employees in a contracted-out workplace pension scheme (Category D)

  • up to GBP 8,060 - 0%
  • GBP 8,061 up to 40,040 - 10.60%
  • GBP 40,041 up to 42,385 - 12%
  • over GBP 42,385 - 2%

Employer Contribution

General employees not in contracted-out pension schemes (Category A)

  • up to GBP 8,112 - 0%
  • GBP 8,113 up to 40,040 - 13.80%
  • over GBP 40,041 - 13.80%

General employees in a contracted-out workplace pension scheme (Category D)

  • up to GBP 8,112 - 0%
  • GBP 8,113 up to 40,040 - 10.40%
  • over GBP 40,041 - 13.80%

Click the following link to the HMRC website for a more detailed breakdown of the applicable rates and thresholds for various employee categories, as well as other benefit details such as for sick pay and maternity pay.

Proposed Changes (1)

Puerto Rico

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Puerto Rico Tax Reform Plans

According to recent reports, the Puerto Rican government is considering options to reform the territory's tax system. Changes being considered include:

  • Replacing the 7% sales and use tax with a goods and services tax (GST), a value added tax, at a percentage rate in the mid teens
  • Simplifying the individual income tax base and lowering top rates
  • Simplifying the corporate tax base and reducing the number of corporate income tax payers by taxing small and medium-sized business as pass-through entities
  • Repealing the gross profits tax (Patente Nacional)
  • Reforming the temporary excise tax on manufactured goods
  • Eliminating certain loopholes and tax preferences

A tax reform bill is expected to be introduced by the government in the coming months.

Treaty Changes (1)

Ethiopia-Qatar

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Update - Tax Treaty between Ethiopia and Qatar

The income tax treaty between Ethiopia and Qatar was signed 10 April 2013. The treaty is the first of its kind between the two countries.

Taxes Covered

The treaty covers Ethiopian tax on income and profit, and the tax on income from mining, petroleum and agricultural activities, and Qatari taxes on income.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services within a Contracting State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 183 days in any 12 month period.

Withholding Tax Rates

  • Dividends - 5%
  • Interest - 5%
  • Royalties - 5%
  • Capital Gains - generally exempt, except for gains from the alienation of immovable property, and gains from the alienation of movable property forming party of the business property of a permanent establishment

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation.

Limitation on Benefits

Article 28 includes a limitation on benefits provision. According to the provision, a resident of a contracting state will not receive the benefits or any reduction or exemption from tax provided for in the treaty if the main purpose or one of the main purposes of the resident or a connected person is to obtain the benefits of the treaty.

Entry into Force and Effect

The treaty will enter into force once the ratification instruments are exchanged. It will apply in Ethiopia from 8 July next following the date of its entry into force, and in Qatar from 1 January of the year following its entry into force.

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