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China Tightening Anti-avoidance Enforcement – Goldman Sachs

29 Sep 2010

The tax authority of Luohe City Henan Province is contemplating imposing RMB 420 million on Goldman Sachs for its indirect transfer of the shares of a Chinese company. Taxand China discusses the details of this high profile Goldman Sachs case and the lessons multinationals can learn to avoid the same result.

Goldman Sachs disposed of shares of Henan Shuanghui Investment Development Co., Ltd. ("Shuanghui Development"), which is registered in China in the last 3 years by transferring shares of intermediate holding companies. The intermediate holding company were ShineB Holdings I Limited ("ShineB") registered in British Virgin Islands and Rotary Vortex Limited ("Rotary Vortex") registered in Hong Kong. In 2006, GoldmanSachs indirectly held 31% shares of Shuanghui Development, but by the end of 2009 indirectly held only 3.3% shares of Shuanghui Development.

In 2007, China introduced general anti-avoidance rules ("GAAR") when issuing the new Enterprise Income Tax Law. According to circular Guoshuihan [2009] No. 698 issued on 12 December 2009, the rule applies where the foreign investing party (which is the actual controlling party) indirectly transfers the equity of the Chinese resident enterprise by arrangement for an unreasonable commercial purpose that is deemed to evade the obligation of paying the enterprise income tax. The competent tax authorities may, upon application to the State Administration of Taxation for examination, re-define the nature of such an equity transfer transaction in accordance with the economic substance and deny the existence of the offshore holding company used for such a taxation arrangement.

Currently the tax authority is collecting the relevant documents to determine whether ShineB and Rotary Vortex have substance. According to reports, as Goldman Sachs indirectly holds many Chinese companies through intermediate holding companies, it may become the subject of a full investigation of Goldman Sachs' investment structure in China.

We note that this is not the first case of this kind. In May 2010, Jiangdu Municipal Jiangsu Province tax authority imposed RMB 173 million on a multinational company for indirectly transfer the equity of a Chinese company.

Taxand's Take

Multinational companies should examine their investment structures and take care in indirectly disposing of shares of a Chinese company through an intermediate holding company.

Your Taxand contacts for further queries are:
Dennis Xu
T. +86-21-6447 7878

Kevin Wang
T. +86-21-6447 7878

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