China Capital Gain Tax when changing WFOE’s owners

#ChinaCapitalGainsTax #ChinaDividendTax #ChinaDTAUSA
Evershine  affiliates, with global hands-on experiences , consult  you to  adopt tax-saving option when changing  shareholder of  your subsidiary in China.

E-mail: phx2cn@evershinecpa.com

CIT-010
There is an USA company, abbreviated as US-D company, due to the merger and acquisition , and finally hold two 100% Hong Kong companies, which are abbreviated to as HK-A company and HK-B company.
HK-A Company is a non-Hong Kong tax resident company with no actual operations. It invested 10 millions RMB in a 100%-controlled subsidiary in Guangzhou, abbreviated to as GZ-C Company. Over the past few years, its accumulated surplus has reached 24 millions RMB.
HK-B Company is a Hong Kong tax resident company with substantial operations and also invests in other Asian countries.
In order to simplify the affiliates structure ,US-D company want to change the the foreign shareholder of GZ-C, from HK-A company to HK-B, and cancel the HK-A company.
How to proceed?

Answer:
Step1:
First, let GZ-C company decide to distribute dividends of 24 millions RMB to HK-A company to reduce GZ-C company’s shareholders’ equity to 10 million RMB, which is the original investment amount.
According to the tax laws of mainland China, if a dividend of RMB 24 millions is distributed to an overseas non-resident enterprise, GZ-C Company is the withholding agent and the withholding tax rate is 10%.
However, if the overseas non-resident enterprise is located in a DTA Treaty with China, the preferential tax rate will apply.
For example: If the tax agreement between the Mainland and Hong Kong applies, the withholding tax rate is 5%.
*Please note : The date of payment of withholding tax is the actual date of dividend payment, not the date of shareholders decision making.
Step 2:
Then GZ-C Company goes through the process of exchanging its foreign shareholder HK-A for HK-B. The transaction price is 10 millions RMB, which is the original investment amount. In this case, HK-A has no investment transaction gain. No Capital gain tax being levied.

CIT-015
On the day GZ-C Company decides to distribute dividends, it distributes a dividend of RMB 24 million to Company HK-A ,
Which government unit does it need to report to?

Answer:
In the quarter in which the dividend payment date is determined, a declaration can be made to the tax bureau under the jurisdiction of the enterprise.
Apart from this, no other government units need to declare.
*Please note:
The date when the dividend is actually paid is the date when the withholding tax is paid.
Dividends can be distributed in installments and withheld in installments.
According to Tax regregulation:
State Administration of Taxation
Announcement on issues related to source withholding of corporate income tax for non-residents
State Administration of Taxation Announcement No. 37 of 2017

CIT-020
In the above scenario, if 100% of the foreign shareholder in GZ-C company is directly sold from HK-A Hong Kong company to HK-B Hong Kong company, what tax will be levied on this transaction?

Answer:
According to Chinese tax laws, the income tax that will generally be levied is as follows:
the transferor is HK-A company, and the transferee is HK-B.
The taxes involved include:
a. Stamp duty:
the transferor HK-A company pays the equity If the transferee is HK-B, it must also pay 0.0005% of the transaction amount.
Assuming that the transaction price is 34 million RMB, the stamp duty is 3400RMB=1700RMB+1700RMB
b. Corporate income tax:
10% of the difference after deducting the net original investments from the transaction amount , which will be minimum in accounting book-value.
Assuming that the transaction price is 34 millions RMB, HK-A company’s stock exchange price is 24 million RMB*10%=2.4 million RMB.

Detailed calculation and tax declaration details of China’s tax laws :
Equity transfer income refers to the equity transfer price minus equity costs The difference after the price.
Equity transfer price refers to the amount received by the equity transferor for the transferred equity, including cash, non-monetary assets or equity.
If the held enterprise has undistributed profits or various funds with after-tax deposits, etc., the amount of the shareholder’s retained earnings rights transferred by the equity transferor together with the equity shall not be deducted from the equity transfer price.
The equity cost price refers to the amount of capital actually delivered to the Chinese resident enterprise by the equity transferor when investing in the equity, or the equity transfer amount actually paid to the original transferor of the equity when purchasing the equity. Article 37 of the “Enterprise Income Tax Law” stipulates that the income tax payable by non-resident enterprises on the income specified in paragraph 3 of Article 3 of this Law shall be withheld at source, and the payer shall be the withholding agent.
In this example, GZ-C Company is the withholding agent.
If the income obtained by a non-resident enterprise is the income from equity transfer, according to the second article of the original Guo Shui Han [2009] No. 698, the non-resident enterprise shall start from the date of equity transfer as stipulated in the contract or agreement (if the transferor obtains the equity transfer income in advance) , should report and pay corporate income tax to the competent tax authority in the place where the income occurs within 7 days from the date of actual income from the equity transfer. This provision is the interpretation of the State Administration of Taxation’s “Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Income Tax at Source for Non-Resident Enterprises”.
For details, please see https://www.chinatax.gov.cn/n810341/n810760/c2878586/content.html

CIT-030
In the above situation, HK-B Hong Kong Company owns GZ-C Guangzhou Company. When GZ-C Guangzhou Company distributes dividends to HK-B Hong Kong Company in the future, due to the previous equity transaction, HK-A Hong Kong Company paid Can the income tax on equity transactions be deducted ?

Answer:
GZ-C Guangzhou Company, after the conversion of foreign shareholders, distributes dividends to the succeeding company, in this case HK-B Hong Kong Company, it still needs to withhold 10%.
Previously, due to equity transactions, the equity transaction income tax paid by HK-A Hong Kong Company could not be deducted. Therefore, if GZ-C Guangzhou Company does not first distribute dividends to HK-A and then transfer it, the entire group will eventually have to pay 10% twice, totaling 20% in short period.
Only when HK-B Hong Kong Company transfers its GZ-C equity or liquidation, due to the investment cost increase, and there will be no problem of paying 10% twice. That means only time difference incurred, not a permanent difference.

CIT-040
HK-A Hong Kong company wants to sell 100% of the equity invested in GZ-C company to HK-B Hong Kong company. If it wants to change shareholders and other information, it needs to update the company registration with the Guangzhou Administration for Industry and Commerce. Is there a website for the Guangzhou Administration for Industry and Commerce?

Answer:
The competent authority is: Guangdong Provincial Administration for Market Regulation https://www.gdzwfw.gov.cn/portal/v2/guide/11440000MB2D0234372440125017038
(Application window) Guangzhou Tianhe Window No. 1 to 7 of the registration hall on the second floor of No. 57 Tiyu West Road, District)
List of materials that need to be prepared:
1. “Company Registration (Filing) Application Form” 2. If the change of registration matters involves the modification of the company’s articles of association, submit the modification of the company’s articles of association Resolutions and decisions (where registration of shareholder change does not require submission of this document, if the company’s articles of association provide otherwise, such provisions shall prevail) 3. If the change of registration involves modification of the company’s articles of association, the revised company’s articles of association or amendment to the company’s articles of association shall be submitted and submitted by The company’s legal representative signs and confirms the company’s articles of association or amendments to the company’s articles of association 4. Relevant supporting documents for the change 5. If laws, administrative regulations and decisions of the State Council stipulate that company changes must be submitted for approval, submit a copy of the relevant approval document or license 6. Return the original and copy of the paper business license that has been collected

CIT-050
Company GZ-C has accumulated profits of RMB 24 million over the past few years.
Company GZ-C wants to distribute dividends of RMB 24 million to Company HK-A.
Can the tax agreement between Mainland China and Hong Kong be applied and a preferential tax rate of 5% be adopted?

Answer:
If the tax agreement between the Mainland and Hong Kong applies, a dividend of RMB 24 million can be distributed before the equity transfer, and the dividend is calculated as 5%.
But the prerequisite is that the HK-A company must be a tax resident (COR: Certificate of Resident) with substantial operations in Hong Kong.
According to the “Arrangements between the Mainland and the Hong Kong Special Administrative Region on Avoiding Double Taxation and Preventing Tax Evasion on Income” issued by the State Administration of Taxation on November 21, 2019, if a Hong Kong company, as a dividend beneficiary, directly holds more than 25% of the shares of a domestic company , the dividend tax is only 5% of the total dividend amount.
The prerequisite for enjoying tax incentives is that it must meet the conditions stipulated in (Guo Shui Han [2009] No. 81), including:
1. Hong Kong companies must obtain a tax resident identity certificate;
2. Hold domestic companies for 25 consecutive months before receiving dividends. % or above of the shares;
3. Submit an application for tax reduction or exemption to the competent tax authority and pass the review.

In other cases that do not meet the above conditions, 10% of the total dividend amount will be applied.
Assuming that HK-A company is a non-substantive operating company and cannot obtain a tax resident certificate (COR: Certificate of Resident) for Hong Kong companies, 10% will be applied.

Taking company HK-A as an example, if it meets the conditions for tax exemption and exemption under the tax agreement between the Mainland and Hong Kong, if a dividend of RMB 24 million is distributed before the equity transaction and a dividend of RMB 1.2 million is levied, the investment amount of RMB 10 million will be used as the transaction amount at the time of purchase and sale.
The stock exchange of HK-A company is zero, and the total income tax levied can be reduced by 1.2 million RMB.

CIT-060
A Guangzhou company, referred to as GZ-C company, repatriates dividends to its parent company in Hong Kong.
It requires Hong Kong and Mainland China to have an agreement to avoid double taxation.
According to the bilateral agreement, 5% is applied for repatriating dividends.
Preferential tax rate, which tax bureau should I go to apply for? Website?

Answer:
Non-resident taxpayers enjoy the benefits of double taxation arrangements signed between the Mainland and the Hong Kong and Macao Special Administrative Regions in accordance with the State Administration of Taxation Announcement No. 60 of 2015 “Measures for the Administration of Tax Agreement Benefits for Non-resident Taxpayers” https ://www.gov.cn/gongbao/content/2016/content_5038098.htm
Non-resident taxpayers who meet the conditions for enjoying the benefits of the agreement can enjoy the benefits of the agreement themselves when reporting tax, or through the withholding agent when reporting tax. treatment and accept follow-up management by the tax authorities.
Non-resident taxpayers refer to taxpayers (including non-resident enterprises and non-resident individuals) who are not tax residents in China according to domestic tax laws or tax agreements.
Non-resident taxpayers who enjoy tax treaty permanent establishment dividends must submit relevant report forms and materials when making their first tax return in the relevant tax year, or when the withholding agent makes their first withholding return in the relevant tax year.
Taxation Bureau Online Application :
Non-resident taxpayers declare to enjoy treaty benefits https://www.gdzwfw.gov.cn/portal/v2/guide/11440000006941354C244042406300101
Guangzhou Municipal Taxation Bureau: No. 767 Huacheng Avenue, Tianhe District, Guangzhou Tel. 020-12366 – 4-2

CIT-070
Hong Kong COR certificate of Resident Which agency should I apply to?

Answer:
Hong Kong Inland Revenue Department (IRD) https://www.ird.gov.hk/chi/welcome.htm
Hong Kong Tax Resident Certificate (Applicable: Company Form) form link https://www.ird.gov.hk /chs/pdf/ir1313a_c.pdfSubstantial
operations usually include the following elements:
having a fixed business location in Hong Kong;
employing a sufficient number of suitable employees in Hong Kong;
generating sufficient operating expenses in Hong Kong;
making necessary management decisions in Hong Kong and Bear corresponding operational risks.

CIT-080
A Hong Kong parent company HK-A receives dividends from its subsidiary GZ-C in Guangzhou, Mainland China, will the Hong Kong parent company HK-A be regarded as Hong Kong income by the Hong Kong Inland Revenue Department and be taxed?

Answer:
No. According to Hong Kong’s <<Inland Revenue Ordinance>>
https://www.ird.gov.hk/chi/tax/bus_pft.htm#a01
, the scope of profits tax is any person, including a corporation , partnership, trustee or A body carrying on a trade, profession or business in Hong Kong and deriving from such trade, profession or business any assessable profits arising in or derived from Hong Kong ( other than profits from the sale of capital assets) is subject to tax.
In this case, the dividend income received by the Hong Kong company from its mainland subsidiary actually came from mainland China, not from Hong Kong, nor was it generated in Hong Kong. Therefore, it will not be levied profits tax in Hong Kong.

CIT-090
What are the dissolution and liquidation procedures of Hong Kong company HK-A?

Answer:
A “limited company” can be wound up.
A limited company is a company incorporated under the Companies Ordinance and is an independent legal entity (that is, it can sue others or be sued).
A limited company will go through the legal process of “liquidation” to sell off all its assets to pay off its debts and eventually wind up the company.
Data source: Hong Kong Government One Stop
https://www.gov.hk/tc/business/supportenterprises/businesstopics/windingup.htm

Overview of the liquidation process
You can get a preliminary understanding of the liquidation process (except voluntary liquidation) through the following flow chart: Step1:
Issue a debt repayment demand to the relevant company
Step2:
Submit a winding-up petition to the court, the Official Receiver’s Office and the relevant company (Note)
Step3 :
Court hearing
Step 4:
The court issues a winding-up order
Step 5:
A meeting of all creditors (i.e. “creditors”) and other relevant parties
Step 6:
Appointment of a liquidator
Step 7:
Sale of the company’s assets and distribution of funds to creditors
Step 8:
Discharge of the liquidator
Step 9 :
Dissolution of a company
( Note: The winding-up process officially begins when the petition is submitted )
https://clic.org.hk/en/topics/bankruptcy_IndividualVoluntaryArrangement_Companies_Winding_up/companies_Winding_up/What_kind_of_companies_can_be_wound_up

CIT-100
Can Hong Kong companies HK-A and HK-B merge?

Answer:
With the introduction of the court-free merger mechanism
under the Companies Ordinance (Chapter 622 of the Laws of Hong Kong) (the “Companies Ordinance”) , the merger of Hong Kong companies can be implemented in a more cost-effective and straightforward manner .
Today, court-free mergers (“mergers”) are a popular method for groups to streamline their structures and operations in Hong Kong .
There are two types of mergers without court in Hong Kong:
1. Horizontal merger: the merger of two or more wholly-owned subsidiaries of the same holding company ; and
2. Vertical merger: a holding company and one or more wholly-owned subsidiaries of the same holding company. Merger of subsidiaries .
Whether it is a horizontal merger or a vertical merger, the relevant regulations and procedures of the Hong Kong Chinese Orchestra must be followed; in particular, each company after the merger must be a joint stock limited company registered in Hong Kong .
Key issues to consider when amalgamating:
If any of the merging companies holds any interests in other foreign entities, or has any overseas offices, properties or businesses, or ( in the case of a horizontal merger) the holding company of the merging companies is not a Hong Kong company , or if there are other circumstances in which a foreign company may be involved.

In this example, Company HK-A is a non-Hong Kong tax resident company with no substantial operations, and can only be merged into Company HK-B, which is a non-Hong Kong tax resident company with substantial operations.
If there is a merger, GZ-C Guangzhou Company, if the name of the foreign shareholder changes, there is still the risk of being taxed 10% of the RMB 2.4 million gained from the investment transaction.
This merge solution is not recommended.

CIT-110
Do USA mother comapny US-D need pay copurate income tax when receiving distributed dividend from China GZ-C company ?

Ans:

Please be aware below Warning:
The above contents are digested by Evershine R&D and Education Center in MAY 2024.
Regulations might be changed as time goes forward and different scenarios will adopt different options.
Before choosing options, please contact us or consult with your trusted professionals in this area.

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