CMS, China | Chinese Tax Regulation Update | October 2016




CMS, China

Dear Sir or Madam,

Please find enclosed our update on the latest developments in Chinese Tax Law.

Kind regards,
CMS, China

Circular
Number
Issuance
Date
Effective
Date
Topic What is new?
Caishui [2016] No. 101 2016-9-20 2016-9-1 Income tax policies of stock incentive schemes and contribution of technological achievements for investment

The Circular grants preferential tax policies for stock incentive schemes and contribution of technological achievements for investment.  The detailed policies are as follows:

  • Individual Income Tax (“IIT”) deferral policies for stock incentive schemes of non-listed enterprises:
  • IIT payment for qualified stock options, share options, restricted stocks and share awards granted to employees by non-listed companies can be deferred till the time when the relevant shares are disposed (originally the IIT needed to be paid at two stages: receipt of shares and disposal of shares).
    In order to be qualified, stock incentive schemes shall satisfy the following conditions:
    (1) The incentives shall be granted by a PRC tax resident enterprise located in China;
    (2) The incentive scheme shall be approved by the board of directors or the shareholders' meeting of the company and list all the detailed contents;
    (3) The underlying shares shall belong to the PRC tax resident enterprise itself. They can also be the shares of other PRC tax resident enterprises located in China if they are acquired through contribution of technological achievements;
    (4) The target individuals entitled to the incentive schemes shall be key technicians or senior management members determined by the board of directors or at the shareholders' meeting and the accumulative number of target individuals shall not exceed 30% of the average number of employees during the recent 6 months;
    (5) The stock options shall have been held for 3 years since the granting date, and 1 year since the date of exercise; the restricted stocks shall have been held for 3 years since the granting date, and 1 year since the end of lock-up period; and the share awards shall have been held for 3 years since the awards are obtained;
    (6) The period for stock (share) options from the date of granting to the date of exercise shall not exceed 10 years; and
    (7) The companies granting share awards and the target companies whose shares are awarded shall not belong to the industries specified in the Catalogue of Restricted Industries subject to Preferential Tax Policies for Share Awards.
  • IIT deferral policies for stock incentive schemes of listed enterprises: After the schemes of stock options, restricted stocks and share awards granted by listed companies to individuals are submitted to the competent tax authorities for filing, the individuals can pay IIT within 12 months since the date of exercise of stock options, the end of the lock-up period of restricted stocks or the date of acquiring the share awards.
  • Selective preferential tax policies of contribution of technological achievements for investment:
  • Enterprises or individuals contributing technological achievements to acquire the shares of a PRC tax resident enterprise located in China may continue to follow the current related tax policies (i.e., evenly recognise the capital gains for taxation purpose during the following 5 years) or select to defer the tax payment till the time when the relevant shares are disposed.
    Regardless which policy an enterprise or individual opts to adopt, the invested enterprise is allowed to record the technological achievements based on the appraised value upon investment and amortise and deduct the value for Corporate Income Tax (“CIT”) purpose.

SAT Announcement [2016] No. 62

2016-9-28

2016-9-1

Taxation of stock incentive schemes and contribution of technological investments for investment

As an auxiliary regulation of the Circular Caishui [2016] No. 101, the Announcement clarifies the tax administration matters of the preferential tax policies rendered to the stock incentive schemes. The main contents are as follows:

  • If an individual selects tax deferral treatment, the enterprise should submit recordal documents to the tax authorities within 15 days following the month when the stock options are exercised, the lock-up period of restricted stocks ends or the shares awards are acquired.
  • If an individual selects tax deferral treatment for investment into a company via contribution of technological achievements, the invested company should submit recordal documents to the tax authorities within 15 days following the month when the technological achievements are contributed and the share considerations are acquired.
  • During the tax deferral period, the IIT withholding agent should submit tax deferral reporting forms to the tax authorities within 30 days after each year end.
  • When the tax declarations are made for disposal of relevant shares in a case where tax deferral treatments have been enjoyed, the individual and the withholding agent should submit documents such as share transfer agreements, equity valuation reports and relevant vouchers to justify the share transfer price, original value of the shares for which the tax deferral treatments have been enjoyed and the taxes and fees for deduction.
  • Enterprises enjoying tax deferral treatment for investment via contribution of technological achievements should be PRC tax resident enterprises which pay CIT on actual profit basis. Such enterprises should fill out recordal forms when they conduct the first provisional CIT declaration after the investments are completed. The tax authorities are empowered to adjust the appraised value of the technological achievements for taxation purpose if they consider that the value is unfair.

SAT Announcement [2016] No. 64

2016-10-11

2016-12-1

Administration of Advance Pricing Arrangements

This Announcement can be regarded as a result of localisation of certain Base Erosion and Profit Shifting (“BEPS”) actions initiated by OECD/G20. This Announcement has updated Chapter 6, relating to Advance Pricing Arrangement (“APA”), of the current PRC transfer pricing (“TP”) regulation (i.e., Guoshuifa [2009] No. 2 (“Circular 2”)). Compared with the superseded Chapter 6 of Circular 2, this Announcement has mainly brought the following changes or new requirements:

  • Stage of preliminary meeting
  • At the stage of preliminary meeting with the tax authorities, the enterprise should submit an application form for preliminary meeting for APA and describe not only the matters that have already been mentioned by Circular 2 for the preliminary meeting stage but also other many aspects covering the organisation and management structures of the enterprise and the group, production and operation status and the contemporaneous TP documentation of the enterprise of the most recent 3 to 5 years, market conditions and location-specific advantages such as cost saving and market premium. Under Circular 2, many documents above were not required until formal negotiation stage.
    The anonymous form of preliminary meeting has been cancelled.
  • Stage of intention for signing
  • If agreements have been reached during the stage of preliminary meeting, the tax authorities will issue tax notices to the enterprise who shall submit the letter of intent for APA and draft application documents, which shall cover not only the aspects at the stage of the preliminary meeting but also the following:
    (1) pricing and calculation methodologies with associated functional and risk analysis, benchmark analysis and assumptions;
    (2) value chain or supply chain analysis, emphasising on the location-specific advantages of cost saving and market premium; and
    (3) annual business scale, performance forecasts and plans for the period covered by the APA.
    The tax authorities can reject the intention for APA if the enterprise is under the investigation for special tax adjustment or other tax cases. Failure to submit reporting forms of annual related party transactions or failure to prepare, keep and provide contemporaneous TP documentation will also give rise to the rejection of the intention for APA.
  • Stage of analysis and evaluation
  • The tax authorities will assess whether the draft application documents are prepared based on arm’s length principle through analysis and evaluation as well as further communication with the enterprise. The tax authorities may require the enterprise to adjust the draft documents if they consider that the documents are not in line with arm’s length principle.
    Value chain analysis and contribution analysis have specifically been incorporated into the aspects to which the tax authorities keep close attention at the stage of analysis and evaluation.
  • Stage of formal application: The tax authorities will issue tax notices to the enterprise to inform that the documents of formal application for APA can be submitted if they consider that the draft application documents are in line with arm’s length principle.
  • Stage of negotiation and signing
    The tax authorities will initiate unilateral negotiations with the enterprise or bilateral (or multi-lateral) negotiations with the tax authorities of other countries / regions which are involved in the relevant double taxation treaties. APA documents will be prepared for conclusion after consensus is reached upon negotiation.
    The Announcement clearly stipulates that the APA can be retroactively applicable to a historical period of up to 10 years. If taxes should be made up by or refunded to the enterprise during the period that the APA covers or the retroactively applicable period, the tax authorities shall issue a tax notice of tax make-up or refund accordingly.
  • Stage of supervision of execution
    During the period of APA execution, the enterprise should submit annual reports to the tax authorities within 6 months following each year end to describe the APA execution status. The tax authorities will also conduct supervision accordingly on an annual basis (Circular 2 stipulated a semi-annual basis).
    Quartile method is adopted by the APA to determine the prices and profit level. During the execution period, if the actual operation result falls outside the quartile range, the tax authorities can adjust the actual result to the median of the quartile range for taxation purpose. If the weighted average amount of annual operation results is lower than the median of the range and not adjusted to the median level when the APA period expires, the tax authorities will not accept the application for APA renewal.
  • It is also worth noting that the State Administration of Taxation can conduct information exchange of unilateral APAs signed after 1 April 2016 with the tax authorities of other countries / regions according to the relevant conventions, treaties or protocols.

In case you have questions or for further information, please contact the author of this newsletter:

Gilbert Shen
Senior Associate
Head of Tax Practice Area Group
CMS, China
T
+86 21 6289 6363

F
+86 21 6289 0731
E
gilbert.shen@cmslegal.cn

 


This information is provided for general information purposes only and does not constitute legal or professional advice. Copyright by CMS, China.

CMS, China
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