06 March 2018 China relaxes beneficial owner rules On 3 February 2018, China's State Administration of Taxation (the SAT) released SAT Public Notice [2018] No. 9 (PN 9), providing guidelines in determining a beneficial owner (BO) qualification under dividends, interest and royalties articles of tax treaties. PN 9 becomes effective as of 1 April 2018. Major changes introduced in PN 9 include the following. - Amendments to negative factors considered in determining a BO status, applicable to dividends, interest and royalties, including but not limited to:
- A decrease in the threshold from 60% to more than 50% for an obligation by an applicant to pay income within 12 months of receipt of the same income to a company located in a third tax jurisdiction
- Clarification of the substantial operational activity scope when assessing an applicant's substance level to include manufacturing, trading and management activities, and also adding investment holding management to qualified activities
- Relaxation of the BO determination for dividend withholding tax, including:
- Expanded scope for the deemed BO safe harbor rule for direct and indirect 100% shareholders that are government, publicly listed companies or individuals
- Under an attribution of substance concept, a reduced dividend withholding tax rate is allowed for non-qualifying applicants if they are held directly or indirectly by qualifying shareholders in the same jurisdiction or jurisdictions with the same treaty benefit
In connection with the issuance of PN 9, the SAT also published its commentaries, including examples which greatly improve the certainty of the relevant treaty benefit applications. PN 9 aims to provide clear guidance on the BO determination and access to tax treaties. However, PN 9 also emphasizes prevention of treaty abuses by reference to Action 6, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances of the Organisation for Economic Co-operation and Development's Base Erosion and Profit Shifting initiative. Since the issuance of the anti-treaty shopping rule in 2009, Chinese tax authorities in general have been aggressive in determining a BO qualification. Multinational companies (MNCs) face difficulties in claiming a reduced treaty withholding tax on dividend distributions from their Chinese subsidiaries. PN 9 provides an opportunity for MNCs to improve cash flow through lower withholding tax on payments from China. MNCs are encouraged to review the existing structure and business models to assess whether PN 9 allows the claiming of reduced treaty rates under tax treaties. Internal restructuring may be considered by leveraging the favorable development under PN 9. For additional information with respect to this Alert, please contact the following: Ernst & Young Tax Services Limited, Hong Kong - Jane Hui
jane.hui@hk.ey.com - Becky Lai
becky.lai@hk.ey.com
Ernst & Young Ernst & Young (China) Advisory Limited, Shanghai - Walter Tong
walter.tong@cn.ey.com - Vickie Tan
vickie.tan@cn.ey.com
Ernst & Young Ernst & Young (China) Advisory Limited, Beijing - Henry Chan
henry.chan@cn.ey.com - Martin Ngai
martin.ngai@cn.ey.com - Andrew Choy
andrew.choy@cn.ey.com
Ernst & Young Ernst & Young (China) Advisory Limited, Shenzhen - Clement Yuen
clement.yuen@cn.ey.com
Ernst & Young LLP, China Tax Desk, New York - Min Fei
min.fei@ey.com - Andrea Yue
andrea.yue1@ey.com - Vickie Lin
vickie.lin@ey.com - Claire Geng
claire.geng1@ey.com
Ernst & Young LLP, China Tax Desk, San Jose Ernst & Young LLP, Asia Pacific Business Group, New York - Chris Finnerty
chris.finnerty@ey.com - Kaz Parsch
kazuyo.parsch@ey.com - Bee-Khun Yap
bee-khun.yap@ey.com
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ATTACHMENT PDF version of this Tax Alert Document ID: 2018-5371 | 
