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Chinese-controlled Resident Enterprises Incorporated Overseas (“CREIOs”)
On 19 August 2011, the State Administration of Taxation issued an announcement containing administrative measures for income tax on Chinese-controlled Resident Enterprises Incorporated Overseas ("CREIO" Trial Implementation). Taxand China examines the classification of CREIOs and the impact this will have on Chinese companies registered overseas
Classification of CREIOs
Articles 2 and 3 of the above mentioned announcement define "CREIOs" as follows:
- Article 2 - The term "Chinese-controlled enterprises incorporated overseas" as used herein refers to enterprises incorporated and established by enterprises or enterprise groups from Mainland China as the main controlling shareholder in countries or regions outside China (including Hong Kong, Macao and Taiwan).
- Article 3 - The term "CREIO" as used herein refers to Chinese-controlled enterprises incorporated overseas which are determined as Chinese-resident enterprises due to the fact that their actual management bodies are in China.
The above classification of "resident enterprise" is in line with the standard OECD definition in Article 4 of the Model Tax Convention on income and on capital. In addition, according to the Enterprise Income Tax (EIT) implementation rules, "actual management bodies" above refers to organs that actually and comprehensively manage and control the production and operation, staff, accounts, property and other aspects of enterprises. Generally, Chinese tax Authorities determine tax residency of a company based on where the directors make management decisions.
Chinese tax Authorities will follow the procedures agreed in the DTT. If any overseas Chinese enterprises consider that they meet the conditions, they must apply to the competent tax authority for determination of resident status. If the competent tax authority discovers that an overseas Chinese enterprise meets Article 2 of the Circular but fails to apply to become a Chinese-resident enterprise, it may investigate where the actual management bodies of the overseas Chinese enterprise are located and require the overseas Chinese enterprise to provide the following documents/materials:
1. A certificate of the legal status of the enterprise.
2. A description of the organisational structure of the enterprise group and an overview of production and business operations.
3. An auditors' report on the enterprise for the previous tax year issued by a CPA (Certified Public Account) for the place where the senior management body responsible for production, business operations and the other affairs of the enterprise performs its duties.
4. Records of the length of stay in China of the directors and senior management personnel of the enterprise for the current and previous years.
5. Resolutions of the board of directors of the enterprise on major matters in the current and previous years and minutes of the relevant meetings.
6. Other materials requested by the competent tax authority.
As a CREIO, the overseas company must report its income as originating both within and outside China pursuant to the relevant requirement in the EIT Law for resident enterprises. Additionally, the CREIO must withhold tax at source on payments to nonresident enterprises.
In addition, the Circular contains clear instructions on claiming the EIT exemption for dividends, bonuses and other equity investment income as well as interest, rents, royalties, property transfer income and other income obtained by a CREIO in China. The CREIO must send a duplicate copy of its "Letter of Determination of Resident Status for the CREIO" to the relevant payers.
Regarding equity transfers, a gain derived from the transfer of a CREIO by a nonresident enterprise is income from China and the CREIO must report the gain to the competent tax authority within 30 days from the date on which the equity transfer agreement is concluded, and provide it with the equity transfer agreement and the relevant documentation.
On the transfer-pricing compliance side, a CREIO must perform the obligations of reporting related-party transactions and preparing contemporaneous documents based on the relevant Chinese tax regulations.
Effective 1 September 2011, the new administrative measures have established a more detailed legal framework for the taxation of Chinese-owned enterprises outside China, which are now classified more clearly. It is important for a foreign company which is owned by a Chinese individual/company to have a thorough understanding of these resident-enterprise implications.
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