Feb 2018, Issue 6
The determination of “Beneficial Ownership” (BO) status for non-tax residents who derive dividends, interests and royalties from China for the purpose of enjoying tax treaty benefits has always been a hot topic. Since 2009, the State Administration of Taxation (SAT) has released several circulars including Guoshuihan  No.601 (Circular 601) which listed seven unfavorable factors for the determination of BO and the SAT Public Notice  No.30 (Public Notice 30) which provided a safe harbor rule for qualified non-tax residents to enjoy treaty benefit on dividends. Nevertheless, taxpayers and local-level tax authorities in China have encountered numerous technical and practical problems when dealing with BO related cases and have been expecting further guidance from the SAT.
On 3 February 2018, the SAT released the long-awaited SAT Public Notice  No.9 (Public Notice 9). Public Notice 9 abolished Circular 601 and Public Notice 30 and comprehensively updates the assessment principles for the determination of BO. Compared with Circular 601 and Public Notice 30, Public Notice 9 has brought about two major breakthroughs for the claiming of tax treaty benefits on dividends: it has extended the scope of non-tax residents who are eligible for the safe harbor rule with respect to dividends; and, qualified treaty benefit applicants may apply a “same country/same treaty benefit rule” under multi-tier holding structures. These breakthroughs will increase non-resident taxpayers’ chance of enjoying treaty benefit on dividends and will be largely welcomed.
Meanwhile, Public Notice 9 has also tightened the first two unfavorable factors of Circular 601. This will be challenging for some non-resident taxpayers as their treaty benefits may be denied for the lack of BO status.
Public Notice 9 will take effect from 1 April 2018. Management of multi-national corporations (MNCs) are suggested to review whether the new changes brought by Public Notice 9 will increase their group companies’ chance of enjoying treaty benefits under the existing investment structure and business models. If needed, they may consider carrying out internal restructuring in order to leverage on the breakthroughs in Public Notice 9. If the extended safe harbor rule or the "same country / same treaty benefit rule” cannot be applied, management need to evaluate the impact of the amended unfavorable factors and establish strategies to deal with these changes. Meanwhile, they also need to prepare proper and sufficient documentation to prepare for the potential challenges from the tax authorities.