Private Equity Tax Express - Issue 1, December 2011
As reported in CTAXNEWS on 8 April 2011, Vodafone Group plc made a RMB 2.196 billion tax settlement with the Beijing State Administration of Taxation (BJ SAT), on the sale of shares in China Mobile Ltd, a Hong Kong - incorporated PRC tax resident company. This is regarded as the first published case where PRC tax was imposed on the disposal by a foreign investor of an interest in a foreign incorporated company, which is regarded as PRC tax resident on the basis of its place of effective management being located in the PRC.
There has been much concern among foreign investors that their indirect transfers of PRC equity investments, through disposals of offshore holding companies, may be subject to PRC tax pursuant to Circular 698. While this still remains a current issue, the Vodafone case highlights an additional tax risk that the gain on the sale of the offshore company may simply be regarded as PRC sourced on the basis of the offshore company's deemed PRC tax residence under PRC domestic tax laws.