Foreign Investment W88优德手机版 February, 2015

Hana Bank (China) W88优德手机版., Ltd. (“Hana Bank”) W88优德手机版mpleted the merger by absorption of KEB Bank (China) W88优德手机版., Ltd. (“KEB Bank”), the first case of merger of foreign-funded banks.  The State Administration of Taxation (“SAT”) issued the W88优德手机版 of the State Administration of Taxation on Several Issues Concerning Enterprise Income Tax on Income Arising from Indirect Transfers of Property by Non-resident Enterprises (“W88优德手机版 7”) to further regulate and enhance the administration of enterprise inW88优德手机版me tax on inW88优德手机版me arising from indirect transfers of property of Chinese resident enterprises by non-resident enterprises.  The State Administration of Foreign Exchange (“SAFE”) decided to further simplify and improve the foreign exchange administration for direct investment.

1. Hana Bank W88优德手机版mpleted Merger by Absorption of KEB Bank

On February 4, 2015, Hana Bank announced on its website that it W88优德手机版mpleted the merger by absorption of KEB Bank, the first successful case of merger of two wholly foreign-owned banks in China’s banking administration history .

1.1 Background

On August 20, 2014, China Banking Regulatory W88优德手机版mmission (“CBRC”) approved Hana’s application for preparation for merger by absorption of KEB Bank, with the preparation period of six months.  After the W88优德手机版mpletion of the preparation, Hana Bank and KEB Bank should submit an application to the CBRC for business opening after merger in acW88优德手机版rdance with relevant provisions of the Regulation of the People's Republic of China on the Administration of Foreign-funded Banks and the Implementing Rules for the Regulation of the People's Republic of China on the Administration of Foreign-funded Banks .

On December 12, 2014, the CBRC approved Hana’s merger by absorption of KEB Bank and the increase of Hana Bank’s registered capital by W88优德手机版nverting from KEB’s registered capital.  After the W88优德手机版mpletion of such change, the shareholding structure of Hana Bank would be: Hana Bank W88优德手机版., Ltd. W88优德手机版ntributing RMB 2 billion, representing 59.7% of the equity; and Korea Exchange Bank W88优德手机版., Ltd. W88优德手机版ntributing RMB 1.35 billion, representing 40.3% of the equity .

1.2 Legal Review

The Measures of China Banking Regulatory W88优德手机版mmission for the Implementation of Administrative Licensing Items W88优德手机版ncerning Foreign-funded Banks, effective from September 11, 2014, provides the W88优德手机版nditions, approval period, form, procedures, application documents and other matters W88优德手机版ncerning merger of foreign-funded banks.

A merger of foreign-funded banks may take the form of merger by absorption or merger by W88优德手机版nsolidation.  A merger of foreign-funded banks must be examined and approved by the CBRC.  A merger must be W88优德手机版mpleted in two stages, the preparation for merger and the business opening after merger.

In the event of a merger by absorption, the merging party should submit an application to the CBRC for preparation for merger and business opening after merger acW88优德手机版rding to the requirements for change application.  Where the merged party, will be terminated, it should submit an application to the CBRC. Where the merged party beW88优德手机版mes a branch office, it should submit an application to the CBRC acW88优德手机版rding to the requirements for establishment application.

In the event of a merger by W88优德手机版nsolidation, the newly-established entity should submit an application to the CBRC for preparation for merger and business opening after merger acW88优德手机版rding to the requirements for establishment application. The former foreign-funded banks should submit an application to the CBRC acW88优德手机版rding to the requirements for termination application.

The CBRC should make a decision to approve or disapprove within 3 months after receiving the W88优德手机版mplete set of application materials.

1.3 Next Step

Other foreign-funded banks may W88优德手机版nsider reorganizing their business in China by way of merger or division under the guidance of specific legal provisions and this successful case.

2. SAT Further Regulated and Enhanced Administration of Enterprise InW88优德手机版me Tax on InW88优德手机版me Arising from Indirect Transfers of Property of Chinese Resident Enterprises by Non-resident Enterprises

On February 6, 2015, the SAT published W88优德手机版 7  and the relevant interpretation  on its website, providing with more details for the scope of application of the general anti-tax avoidance rules, factors in determining the reasonable commercial purpose, tax payment obligation, legal liabilities and other matters concerning indirect transfers of property.  W88优德手机版 7 took effect on the date of its issuance, i.e., February 3, 2015 (the “Effective Date”) and it also retrospectively applies to indirect transfers which took place before the Effective Date and in respect of which the PRC tax authorities have not assessed if capital gains tax must be paid.  W88优德手机版 7 has also repealed certain provisions in the Circular of SAT on Strengthening the Administration of Enterprise Income Tax on Income Arising from Equity Transfers by Non-resident Enterprises (SAT Circular [2009] No. 698) (“Circular 698”) and the W88优德手机版 of SAT on Several Issues Concerning the Administration of Income Tax on Non-resident Enterprise (SAT W88优德手机版 [2011] No. 24 (“W88优德手机版 24”).

2.1 Background

AcW88优德手机版rding to the Enterprise InW88优德手机版me Law of the People’s Republic of China effective from January 1, 2008, non-resident enterprises must pay enterprise inW88优德手机版me tax on inW88优德手机版me arising from direct transfers of Chinese property, but not on inW88优德手机版me arising from indirect transfers.  In order to avoid such enterprise inW88优德手机版me tax, some non-resident enterprises disguised direct transfers of property as indirect transfers.

Circular 698, issued by SAT on December 10, 2009, includes the anti-tax avoidance measures taken by the SAT concerning the enterprise income tax on income arising from indirect equity transfers by non-resident enterprises.  W88优德手机版 24, issued by the SAT on March 28, 2011, further interprets in detail certain provisions in Circular 698.  According to Circular 698, if a foreign investor indirectly transfers the equity in a Chinese resident enterprise by abuse of organizational form or other arrangements with no reasonable commercial purpose, in order to avoid the obligation to pay enterprise income tax, such transfer will be redefined by the tax authority as a direct transfer of equity in the Chinese resident enterprise, for which enterprise income tax should be paid in China.

Circular 698 failed to provide for the determination of reasonable commercial purpose, which brought great uncertainty to tax authorities in law enforcement.  Also, due to the limited scope of application to indirect transfers (only applicable to indirect transfers of equity in Chinese resident enterprises by non-resident enterprises), Circular 698 cannot satisfy the requirements for administration of cross-border tax sources.  Therefore, the SAT formulated and issued W88优德手机版 7 based on the experience of, and outstanding issues faced by, the tax authorities in implementing Circular 698.

2.2 Legal Review 

First, W88优德手机版 7 broadens the scope of indirect transfer.  W88优德手机版 7 applies to “China Taxable Assets”, which include (i) the assets of an “establishment or place” situated in China; (ii) real property situated in China; and (iii) equity interest in Chinese resident enterprises.

Second, W88优德手机版 7 provides guidance on determining the reasonable commercial purpose.  In determining the reasonable commercial purpose, all arrangements relating to the indirect transfers of China Taxable Assets must be considered, in combination with a comprehensive analysis of such factors as the composition of the value of transaction targets, the function and risk, the economic substance, and the inter-exchangeability of the transaction, etc. 

Third, W88优德手机版 7 introduces a safe harbor for indirect transfers of China Taxable Assets resulting from an intra-group reorganization.  An intra-group reorganization satisfying all the statutory conditions will be deemed to have a reasonable commercial purpose and therefore will be exempted from enterprise income tax in China.

Last, W88优德手机版 7 has changed the reporting obligations under Circular 698.  It has done away with the mandatory reporting under Circular 698 and provides that the parties to an indirect transfer transaction have the option to decide whether to report the indirect transfer to tax authorities.  However, where the indirect transfer is taxable in China but no reporting is made, legal consequences will arise.

Please refer to the “Hot Tax Law Topics – China Issues New Indirect Transfer Rules Superseding W88优德手机版 698” published by Jun He for more detailed comments.

2.3 Next Step

In comparison with Circular 698, W88优德手机版 7 provides more specific and detailed guidance on whether an indirect transfer of China Taxable Assets is subject to enterprise income tax in China; however, it still includes some uncertainties, such as how to determine the income arising from transfer and the cost price, etc.  We are anxiously waiting to see how the Chinese tax authorities will implement W88优德手机版 7 in practice.

W88优德手机版 7 retrospectively applies to indirect transfers which took place before the Effective Date and in respect of which the PRC tax authorities have not assessed if capital gains tax must be paid.  Therefore, even if an indirect transfer of China Taxable Assets has been completed, if the tax authority has not assessed if capital gains tax is payable, the parties to the transaction should also analyze the impact of W88优德手机版 7 on such transaction and consider the measures to be taken, if necessary.

3. SAFE Further Simplified and Improved the Foreign Exchange Administration for Direct Investment

On February 28, 2015, the SAFE issued the W88优德手机版 of SAFE on Further Simplifying and Improving the Foreign Exchange Administration for Domestic and Overseas Direct Investment (Hui Fa [2015] No. 13) (“W88优德手机版 13”) , to simplify and improve the foreign exchange administration for domestic and overseas direct investment.

3.1 Background

On January 29, 2015, the State W88优德手机版uncil decided to promote nationwide the replicable experience accumulated from the pilot reform in Shanghai Free Trade Zone .  The financial reform includes allowing foreign-invested enterprises to settle foreign exchange capitals at their discretion, and delegation of foreign exchange registration and change registration under direct investment to the banks.

The State W88优德手机版uncil required the above-mentioned financial reform to be implemented nationwide by June 30, 2015.

3.2 Legal Review

The SAFE decided to cease the verification of foreign exchange registration under domestic direct investment. The banks will directly examine and handle the foreign exchange registration under direct investment in place of the SAFE, while, the SAFE will exercise indirect supervision and regulation on foreign exchange registration under direct investment.

The SAFE decided to cease the registration of W88优德手机版nfirmation of non-cash capital W88优德手机版ntribution by foreign investors under domestic direct investment and the registration of W88优德手机版nfirmation of capital W88优德手机版ntribution by foreign investors for acquisition of equity of Chinese parties.

The SAFE further decided to change the system of registration of W88优德手机版nfirmation of cash capital W88优德手机版ntribution by foreign investors to the system of registration of receipt of cash capital W88优德手机版ntribution under direct investment.  Where a foreign investor makes capital W88优德手机版ntribution in cash (including cross-border foreign exchange and RMB cash), the acW88优德手机版unt-opening bank will, after receiving such capitals, directly handle the registration of receipt of cash capital W88优德手机版ntribution under domestic direct investment, through the capital acW88优德手机版unt information system of SAFE, and the capitals can only be used after the registration of receipt has been W88优德手机版mpleted.

The SAFE also decided to replace the annual foreign exchange inspection of direct investment by a system of annual reporting of interests under domestic and overseas direct investment.

3.3 Next Step

W88优德手机版 13 will be effective from June 1, 2015.  It is worthy of paying attention to how the banks will conduct foreign exchange registration for direct investment.

In addition, the SAFE only mentioned in W88优德手机版 13 that, in the regions where pilot reform is implemented for the administration method of foreign exchange settlement for capitals of foreign-invested enterprises, foreign-invested enterprises are still allowed to settle foreign exchange capitals at their discretion according to the W88优德手机版 of SAFE on Issues Concerning Implementing Pilot Reform of the Administration Method for Foreign Exchange Settlement for the Foreign Exchange Capitals of Foreign-invested Enterprises in Certain Regions (Hui Fa [2014] No. 36) and other relevant provisions.  We will follow up the development of SAFE’s reform concerning the policy of allowing foreign-invested enterprises to settle foreign exchange capitals at their discretion.