That Offshore SPV May Not Be As Useful As You Think

2009-11-20

China’s crack down on tax anti-avoidance took another major step forward with the release of a new Circular by the SAT which may severely restrict the ability of offshore holding companies to take advantage of tax treaty benefits. The SAT’s “Notice on Interpretation and Determination of Beneficial Owner under Tax Treaties” (Guoshuihan [2009] No. 601, or “Circular 601”), directs local tax authorities to investigate whether an applicant satisfies the requirements to qualify as a beneficial owner, which is a pre-requisite to enjoy the benefit of a reduced withholding tax on dividends, interest, royalties or capital gains under a double tax arrangement. (King & Wood's China Law Insight)

This looks vaguely important, although I don't really know how many foreign investors qualified for the tax treaty benefit before the new rule.

The majority of inward foreign investment into China is done through Special Purpose Vehicles (SPVs), many of which are based in low tax/no tax jurisdictions (tax havens) and are merely flow-through entities that don't conduct any real business. There are a lot of reasons for investing through an SPV, tax being one of the more significant ones.

If, because of this new rule, tax benefits will be reduced, it will be interesting to see whether this would lead to a lot of offshore restructuring. Again, tax is only one reason for this type of structure, and in some cases other reasons might be seen as outweighing the tax concerns.

Anyway, the post on this is good stuff, if you're into FDI or M&A type work, or if you're having trouble sleeping.

By the way, the lack of a link is not my fault. The very good King & Wood blog, which I recommend for China FDI lawyers, has some trouble with linkbacks in their RSS feed.

Tags: China Law