Summary: Keywords: cross-border restructuring, special tax treatment, caishui (2009) No. 59, tax general announcement No. 7 of 2015

Recently, the Beijing Chaoyang District Tax Bureau of the State Administration of Taxation conducted an investigation on the cross-border restructuring business of Group M, a non-resident enterprise in Country X. By verifying the details of the restructuring business, it confirmed the enterprise split link in the cross-border restructuring business, in essence, non-resident enterprises directly transfer the equity of resident enterprises in China, and can not apply special tax treatment, should be in accordance with the provisions of China's tax law to China's tax authorities to declare and pay enterprise income tax 0.23 billion yuan. After many interviews with M Group, the enterprise finally accepted the opinions of China's tax authorities and paid the tax in full. The cross-border reorganization was completed in more than 20 days. The main steps are as follows:

In the first step, Company C, a subsidiary of Group M, will be separated to form a new enterprise, Company D, and Company F, a resident enterprise engaged in S product business held by Company C, will be transferred to Company D, in order to achieve the S product business from C company to D company's goal.

in the second step, company B, the parent company of company c (group m), will inject its equity in company d into company e (group m), a wholly-owned subsidiary of company B.

in the third step, group n of country g acquires 75.5 of the shares of company e in the form of cash payment, while company B of group m continues to hold 24.5 of the shares of company e.

The tax authorities' opinion on the above reorganization of Group M is:

The three steps of the reorganization are separate transactions that identify tax-related circumstances and obligations;

in the first step, company B transfers the equity to company e, a subsidiary of company B, less than 10 days after acquiring the equity of company d after separation, in violation of the (V) provisions of Article 5 of Caishui (2009) No. 59, "The original major shareholders who have obtained equity payments in the reorganization of an enterprise shall not transfer the acquired equity within 12 consecutive months after the reorganization." and therefore does not apply to special tax treatment;

in the second step, company B transfers the equity held by company d to company e, which belongs to the internal reorganization of group m and has reasonable commercial purposes. according to article 6 of the total tax announcement no 7, 2015, it does not belong to the transfer of the equity of company f, a resident enterprise in our country, no tax;

in the third step, company B transferred 75.5 per cent of company e's equity to group n for reasonable commercial purposes, but company f's equity was transferred out of group m, this cross-border restructuring business does not meet the conditions for special tax treatment and constitutes an indirect transfer of equity of resident enterprises by non-resident enterprises. According to the State Administration of Taxation Announcement No. 7 of 2015 "Announcement on Several Issues Concerning Enterprise Income Tax on Indirect Transfer of Property by Non-resident Enterprises" (hereinafter referred to as "Announcement No. 7 of 2015 of the General Administration of Taxation"), this link shall be taxed 0.23 billion yuan.

the opinions and handling results of the competent tax authorities on the tax-related matters were published in the China tax daily as a typical case and were widely praised and praised. However, the opinion of the competent tax authorities is questionable.

first of all, the tax-related issues of reorganization and equity transfer completed continuously by group m (specifically company B) in three steps within 20 days should not be divided into three independent transactions, but should be regarded as one transaction. The reasons are:(1) Both the first and second steps belong to the equity restructuring within M Group, and their actions have not led to changes in the equity rights and interests of China's resident enterprise F Company (still within the group), which are not regulated by China's tax law but by the tax law of the place of registration in M country;(2) The internal reorganization of M Group involved in the first and second steps does not trigger tax obligations, there is no need to independently identify its tax-related obligations from the tax law;(3) If the third step is considered to involve a 75.5 percent change in the equity interest of Company F, the tax-related circumstances of the first and second steps need to be further identified, and all three steps are considered to be regulated by Chinese tax law, the reorganization of group m and the transfer of 75.5 per cent of company f's equity are completely subject to article 10 of the notice on several issues concerning the treatment of enterprise income tax in enterprise restructuring business (2009) No. 59. "when an enterprise conducts a step-by-step transaction of its assets and equity within 12 consecutive months before and after the reorganization, the above transaction shall be treated as an enterprise restructuring transaction according to the principle of substance over form." According to the regulations, this reorganization and transfer should be regarded as a tax-related business rather than three tax-related businesses. (4) From the perspective of business common sense and logic, the purpose of the first and second steps of M Group's reorganization is to pave the way for the third step of equity transfer. The purpose of all steps is only one & mdash;& mdash; Equity transfer.

secondly, the tax authorities believe that company B transferred the equity to company e, a subsidiary of company B, less than 10 days after acquiring the equity of company d after the division, so the division cannot be treated with special tax. this opinion is far-fetched. The reasons are:(1) The above-mentioned actions have not led to the change of equity rights and interests of Company F, a resident enterprise in China (still within the group), and are not regulated by the Chinese tax law, but by the tax law of the place of registration in Country M;(2) Even according to the Chinese tax law, the above-mentioned separation is the reorganization of equity (assets) within Group M, and the shareholders of Company C and Company D after the separation are still B, according to Caishui (2009) No. 59, it meets the requirements of special tax treatment. (3) If the tax authorities believe that Company B has transferred its equity within 12 months after acquiring the equity of Company D, it shall apply Article 10 of Caishui (2009) No. 59, "Enterprises shall trade their assets and equity step by step within 12 consecutive months before and after the reorganization, the transaction should be treated as an enterprise restructuring transaction in accordance with the principle of substance over form." The provisions of Article 5, paragraph (V), of Caishui (2009) No. 59.

again, the tax authorities believe that the transfer of company B's equity in company d to company e is an intra-group reorganization, which meets the requirements of special tax treatment. this opinion is contradictory. The reasons are:(1) Intra-group share transfers can be subject to special treatment, and why can't intra-group separation be subject to special tax treatment? (2) How does the transfer of Company D's equity to Company E, which has been identified as a reorganization rather than a transfer, become the "transfer" in the previous step "? In other words, the transfer of the equity held by Company B to Company E is a further reorganization rather than a transfer, and the provisions of Item (V) of Article 5 of Caishui (2009) No. 59 cannot be applied.

finally, company B transferred 75.5 per cent of company e's equity to group n. the tax authorities considered it to have reasonable commercial purposes but constituted a transfer of equity interests in company f, a resident enterprise in China, so it should pay tax of 0.23 billion yuan. This opinion violates the provisions of the General Tax Announcement No. 7 of 2015 and is self-contradictory, which will be discussed later in this article.

Caishui (2009) No. 59 was jointly formulated by the Ministry of Finance and the State Administration of Taxation. It generally belongs to the scope of domestic tax policy rather than international tax law and foreign tax law, so it is mainly applicable to tax-related treatment of resident enterprise restructuring. When the dividends or equity of a foreign-funded enterprise as a resident enterprise changes, it may involve the collection and administration of withholding income tax for foreign shareholders of the foreign-funded enterprise. However, the factual basis of the right of collection and administration is the change of equity interests of resident enterprises (specifically foreign-funded enterprises), and the legal basis is the tax agreement (arrangement) between the country (place) where the resident enterprise is located and the country (place) where the foreign investor is located, and the scope and boundary of such tax collection and administration are highly limited.

Caishui (2009) No. 59 only stipulates in Article 7 that "enterprises have equity and asset acquisition transactions between China and abroad (including Hong Kong, Macao and Taiwan), in addition to meeting the conditions stipulated in Article 5 of this notice, the following conditions should also be met before the special tax treatment regulations can be selected:.......". It can be seen that only acquisition transactions involving cross-border equity and assets, as they involve the transfer of equity interests in resident enterprises (foreign-funded enterprises), involve the determination that cross-border restructuring is subject to special tax treatment or general tax treatment according to Caishui (2009) No. 59, otherwise it is not subject to Chinese tax laws or tax policies. In the process of this reorganization, there is no cross-border acquisition of F company's equity or assets in the first and second steps, and there is no room for using Caishui (2009) No. 59. The third step is not a reorganization in a strict sense, but an equity transfer after M Group completes the first and second steps of reorganization, if the issue of indirect transfer of equity interests in Company F of a resident enterprise is involved and triggered, it shall first be determined whether the tax obligation is triggered in accordance with the relevant provisions of the General Tax Announcement No. 7, 2015, "Announcement on Certain Issues Concerning Corporate Income Tax on Indirect Transfer of Property by Non-resident Enterprises.

In other words, the tax collection and management of cross-border restructuring in Caishui (2009) No. 59 should be limited to cross-border tax-related acts that lead to the transfer of equity and assets of foreign-funded enterprises, and the separation and merger of foreign investors abroad, there is no room for the application of Caishui (2009)59.

If an overseas investor transfers the equity or assets of a resident enterprise (foreign-funded enterprise) in the host country (place), the tax authority of the host country (place) levies withholding income tax on the overseas investor, which is in line with the enterprise income tax law and international tax agreements and practices. Therefore, the purpose of Article 7 of Caishui (2009) No. 59 is to give cross-border direct acquisitions the opportunity for special tax treatment and to obtain temporary tax exemption for cross-border direct acquisitions, rather than to create extraterritorial jurisdiction for Caishui (2009) No. 59.

In short, Caishui (2009) No. 59 is only directly applicable to tax-related cross-border direct acquisitions; for the adjustment and transfer of the overseas shareholding structure of the group to which a foreign-funded enterprise (resident enterprise) is located, the premise of applying Caishui (2009) No. 59 to determine whether it is subject to special tax treatment or general tax treatment is that the provisions of General Tax Announcement No. 7 2015 shall first be applied to determine that China's withholding income tax obligations are involved. If so, there is room for applying Caishui (2009) No. 59, otherwise.

The (I) tax authorities shall bear the burden of proof for taxing the offshore indirect transfer of equity of a resident enterprise

according to article 1 of the general tax announcement no 7 of 2015, "if a non-resident enterprise indirectly transfers the equity and other property of a Chinese resident enterprise through an arrangement that does not have a reasonable commercial purpose and evades the enterprise income tax obligation, it shall be in accordance with the provisions of article 47 of the enterprise income tax law, this indirect transfer transaction is recharacterized as a direct transfer of property such as equity in a Chinese resident enterprise." According to the provisions of the Law of the People's Republic of China, only for the indirect transfer of the equity of a resident enterprise in order to avoid the tax liability of the income and not for a reasonable commercial purpose, the indirect transfer of equity is characterized as a direct transfer of equity, and then the implementation of tax collection and administration. For the offshore indirect transfer of the equity of a resident enterprise, because its apparent direct transfer occurs outside the territory, the parties to the transaction may claim that the Chinese tax authorities have no tax collection and administration power, and if the tax authorities want to exercise the tax collection and administration power, they need to prove that the purpose of the offshore indirect transfer is tax avoidance and the offshore transfer has no purpose.

(II) According to Article 6 of General Tax Announcement No. 7, 2015, both the first and second steps of this reorganization are tax-free

in the first step, the separated company d accepted the equity of company f originally held by company c, while both company c and company d are 100 percent held by company B, in line with item 3 of paragraph 1 of article 6 of the general tax announcement no 7 of 2015, "if the indirect transfer of taxable property in China meets the following conditions at the same time, it shall be deemed to have reasonable commercial purposes: ...... 3. the transferor of equity and the transferee of equity are directly or indirectly owned by the same party." The provision, which has a reasonable commercial purpose, does not involve the question of the indirect transfer being deemed to be a direct transfer and involves China's tax obligations, and thus does not involve the question of whether special tax treatment applies.

in the second step of this reorganization, company B will transfer its equity in company d to company e, because company e is a subsidiary of company B with 100 percent of the shares, this act conforms to item 1 of paragraph 1 of article 6 of the general tax announcement no 7 of 2015, "if the indirect transfer of Chinese taxable property meets the following conditions at the same time, it shall be deemed to have reasonable commercial purposes: ...... 1. the equity transferor directly or indirectly owns more than 80% of the equity of the equity transferee;" The provisions of "also do not involve China's tax obligations and there is no room for special tax treatment.

(III) tax authorities' logical error in taxing equity transfers in step 3

according to article 1 of the general tax announcement no 7 of 2015, the tax authorities must first provide evidence and determine that the indirect transfer of equity does not have a reasonable commercial purpose before initiating the determination of the nature of direct transfer and taxation procedures. According to an article published in the China Taxation News, the tax authorities have determined that the transfer has a specific and reasonable commercial purpose, but have identified the indirect transfer as an act that is liable to Chinese corporate income tax. The reasoning logic is wrong and also violates the provisions of Article 1 of the General Tax Announcement No. 7 of 2015. As mentioned earlier, the extraterritorial indirect transfer of equity has a reasonable commercial purpose, does not bear the Chinese enterprise income tax liability, there is no according to the tax (2009) No. 59 to determine that its transaction belongs to the special tax treatment or general tax treatment basis.

(IV) criteria for determining whether an extraterritorial indirect transfer of shares has a reasonable business purpose

in general, a comprehensive judgment is adopted on whether the indirect transfer of equity has a reasonable commercial purpose, that is, according to article 3 of the general tax announcement no 7, 2015, "to judge the reasonable commercial purpose, all arrangements related to the transaction of indirect transfer of Chinese taxable property shall be considered as a whole, and the following relevant factors shall be comprehensively analyzed in the light of the actual situation: (1) whether the main value of the equity of the foreign enterprise comes directly or indirectly from the Chinese taxable property; whether the assets of the (II) foreign enterprise mainly consist of direct or indirect investment in China, or whether the income derived from it mainly comes directly or indirectly from China; (III) whether the functions actually performed and risks assumed by overseas enterprises and subordinate enterprises that directly or indirectly hold Chinese taxable property can prove that the enterprise structure has economic substance; (IV) the duration of shareholders, business models and relevant organizational structures of overseas enterprises; (V) the income tax payable abroad for indirect transfer of Chinese taxable property transactions; (VI) the substitutability of indirect investment, indirect transfer of Chinese taxable property transactions and direct investment, direct transfer of Chinese taxable property transactions by the equity transferor; (VII) the circumstances of the applicable tax treaties or arrangements in China for the income from the indirect transfer of Chinese taxable property; (VIII) other relevant factors." The provisions of the comprehensive judgment.

The comprehensive judgment method is reasonable and fair, but its conclusion is easy to hold different opinions and different opinions. Therefore, in practice, the tax authorities usually determine that the indirect transfer of equity is not commercially reasonable by means of direct judgment, that is, according to Article 4 of Announcement No. 7 of the General Administration of Taxation 2015, "except for the circumstances specified in Articles 5 and 6 of this Announcement, if the overall arrangement related to the indirect transfer of Chinese taxable property meets the following circumstances at the same time, there is no need to analyze and judge according to Article 3 of this Announcement, it shall be directly determined as having no reasonable commercial purpose: (1) more than 75% of the value of the equity of the overseas enterprise comes directly or indirectly from the taxable property of China; (II) at any time point in the year before the indirect transfer of the taxable property of China, more than 90% of the total assets of the overseas enterprise (excluding cash) directly or indirectly consists of investment in China, or within the year before the indirect transfer of the taxable property of China, more than 90% of the income of overseas enterprises comes directly or indirectly from the territory of China; (III) overseas enterprises and subordinate enterprises that directly or indirectly hold Chinese taxable property are registered in the country (region) where they are located to meet the organizational form required by law, but the actual functions and risks they perform are limited, which is not enough to prove that they have economic substance; the tax liability of income tax payable abroad on (IV) indirect transfer of Chinese taxable property transactions is lower than the possible tax liability in China on direct transfer of Chinese taxable property transactions." The provisions of the direct determination.

it can be seen that in this case, the tax authorities can only impose tax collection if they prove that the following four conditions are met at the same time: 1. 75% of the equity value of company e at the time of transfer comes from company f; 2. More than 90% of the assets or income of Company E within one year before the transfer came from Company F; 3. Company B, Company E and Company D are all shell companies holding shares, which do not meet the economic essence; 4. The income tax payable by Company B in the transfer of Company E's equity in the location of Company B is lower than the Chinese tax burden involved in the direct transfer of Company F's equity by Company C. However, as the tax authorities believe that the transfer has a reasonable commercial purpose, so no such verification, analysis and determination.