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The future of outbound investment from China: a 2020 perspective

The future of outbound investment from China: a 2020 perspective
16 May 2014

China is the third largest outbound investment country worldwide and the USA’s fastest growing source of foreign investment. However Chinese investors face a multitude of challenges with the current regulatory regime including having to report to, or achieve approval from, 10 different agencies, on top of legal, tax & regional hurdles. Taxand discussed the 2020 trends in outbound investment at the Taxand Global Conference hosted by Taxand China in Shanghai today.

Frederic Donnedieu de Vabres, Chairman of Taxand, provides an overview of the session presented by Diego D’Alma of Taxand Spain and Ernesto Perez of Taxand USA:

“2012 saw $43 billion of M&A activity in China, but this level of activity does not come without its challenges. The biggest challenge for Chinese outbound investment (OI) is the country’s regulatory framework.  Come 2020 there is hope that more flexibility in approval procedures will be achieved, the removal of inconsistencies among different authorities will be addressed, the scope of Enterprise Income Tax will be expanded and many Direct Tax Agreements (DTAs) will have been renegotiated.

“Until then investors will continue to efficiently structure their OI using the variety of legal structures available to them, including Joint Ventures and Holding Companies.  The Holding Company structure remains highly popular with Chinese investors particularly as an investment platform into Latin America. Spain’s ETVE (“Entidad de Tenencia de Valores Extranjeros”) structure has proved attractive due to local tax treaties providing favorable treatment, as well as the benefits of a shared language and common legal background (including the protection offered by the European Union (EU) framework.)

“In the USA, this structure is also commonplace but comes with challenges around the nation’s taxation of foreign nationals, particularly with transfer pricing rules as well as compliance issues to which many holding companies must adhere. The US does have a tax treaty in place with China, making direct investment possible. However, the Limited on Benefits (LOB) provision presents a number of detailed requirements, particularly around substance, making investment from China more difficult than it can be elsewhere.  There are also a number of state-specific regimes to bear in mind, so assessing investment based purely on a federal view is naïve."

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Taxand's Take

"By 2020, Taxand believes that there is likely to be more Government support for outbound investment. It is also expected that M&A deals between Chinese investors and Western sellers will become progressively easier, as the number of treaties increases and a greater understanding of cultural differences during deal negotiations is reached.”

Taxand's Take Author