A “beneficial ownership” requirement is usually included in the dividend article of China’s income tax treaties. However, the term “beneficial ownership” is not uniformly defined, and the Chinese approach has been widely recognized as demanding and difficult to satisfy.
The clarifications contained in the April 2013 circular potentially make Hong Kong a jurisdiction of choice for establishing holding structures for investment into China and may prompt foreign enterprises to consider restructuring their holding arrangements in China.
An increased focus of the Chinese tax regime concerns the imposition of withholding tax on dividends paid to non-residents investing and operating in China.
China’s corporate income tax law provides that, to the extent that a foreign enterprise has neither tax residence nor a permanent establishment in China, the entity is not subject to tax on an assessment basis. Rather, withholding tax (at a rate of 10%) is imposed on any income sourced in China.
China’s income tax treaties (e.g., the income tax treaty with Hong Kong) may allow for a reduced withholding tax rate. Under the treaty provisions, the withholding tax rate is only 5% if the foreign enterprise receiving the dividend (1) holds at least 25% of the dividend-paying company equity, and (2) is a resident of the treaty-partner country / jurisdiction.
A “beneficial ownership” requirement is usually included in the dividend article of the income tax treaties. Guidance on the meaning of beneficial ownership includes a series of “adverse factors” that must be taken into account in evaluating whether the foreign enterprise qualifies as the beneficial owner of the dividend income. While there is no fixed, internationally agreed approach to the determination of beneficial ownership, the Chinese approach has been widely recognized as demanding and difficult to satisfy.
Also, other guidance sets out an application procedure—and extensive documentation requirements—that must be completed in advance of securing income tax treaty relief. Therefore, each and every income tax treaty-related claim in China will be subject to scrutiny.
The April 2013 guidance, depending on the manner in which it is ultimately implemented by local tax authorities, could improve access to income tax treaty-related reductions of withholding tax on dividends when the claimant is a Hong Kong tax-resident enterprise.
Read a June 2013 report [PDF 296 KB] prepared by the KPMG member firm in China: PRC Non-Resident Enterprise Tax Series: Significant relaxation of the beneficial ownership criteria under the Hong Kong – Mainland double taxation arrangement