The State Administration of Taxation (SAT) has planned to investigate the distribution of dividends made to nonresidents in calendar year 2012 and 2013 with a view to find out tax evasion activities and to undertake risk analyses, risk verifications and assessment of appropriate penalties for tax violations. The SAT will first collect the facts on declared dividend not yet distributed or paid without withholding tax to a related party or a controlled party in China designated by the foreign shareholder. The SAT will also collect the evidence of potential disguised dividends, conversion of dividends to capital or used for reinvestment without withholding tax, treaty benefits obtained by using an agent or a conduit company in a jurisdiction with a favorable withholding tax rate on dividends under a treaty and other tax avoidance risks associated with dividends and equity investment. The above initiative is in conjunction with anti-treaty shopping rule under Circular Guoshuihan [2009] No.601 (Circular 601) issued in 2009.
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