Strategizing Mainland China investment exit through indirect equity transfers

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Jan 2018

In recent years, an off-shore holding company (usually registered in registered in the Cayman Islands) has been widely used for investments in the Mainland China, especially for investing into start-up companies.  In the year 2015, the Mainland China has introduced the famous Public Notice 7 to govern the transfer of assets in the Mainland China through the transfer of offshore companies’ shares (“indirect equity transfers”) from China withholding tax perspective.  After a few rounds of successful cases where investors of a Cayman Islands company agreed to pay China withholding tax under an indirect equity transfer situation in the past few years, the China tax authorities have been more active in searching for similar tax collection opportunities. This article tries to summarise some of our observations of the current practices in the indirect equity transfer area for the tax reporting obligation for the offshore structure entities.

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