Since the ‘Economic Reform and Opening up’, China has maintained an ongoing economic boom which has resulted in the accumulation of a considerable amount of wealth in the value of immovable properties, equity investments and other properties. These huge amounts of capital appreciation constitute a very important source of cross-border tax revenue for China. Under the existing tax laws and regulations, generally, gains arising from a direct transfer of properties in China by Non-TREs should be subject to China Corporate Income Tax (CIT) while those arising from an indirect transfer should not. From a tax perspective, some taxpayers package a direct transfer of properties in China as an indirect transfer in order to avoid China CIT. To tackle the issue of indirect transfer of equity investments in China, the State Administration of Taxation (SAT) released The Notice Regarding Reinforcing the Administration of CIT collection on Income Derived from Equity Transfer by Non-TREs (Guoshuihan [2009] No.698, hereinafter as ‘Circular 698’) in December 2009. In order to further strengthen the tax administration on cross-border transactions and to crack down the cross-border tax evasion and avoidance, the SAT has summed up the experience and key issues on implementing Circular 698 in the past five years and, with a view to enhance the certainty of tax policies and tax compliance, released The Public Notice Regarding Certain CIT Matters on Indirect Transfer of Properties by Non-TREs (hereinafter as ‘the Public Notice’) recently.

According to an in-charge official from the International Taxation Department of the SAT, the release of the Public Notice is in line with President Xi Jinping’s speech on G20 Summit, which re-affirmed the importance of “reinforcing the international collaboration on tax matters, and cracking down on cross-border tax avoidance and evasion”. The release of the Public Notice is an active move to echo the taxation reform promoted by G20 and respond to the Base Erosion and Profit Shifting (BEPS) Project. The Public Notice is also a practical application of the General Anti-Avoidance Rule (GAAR) in respect of the indirect transfer of taxable properties in China.