Big News: China Loosens Beneficial Ownership Conditions on Treaty Benefit Application!

​published on March 1, 2018


Since years, assessment of "beneficial ownership" has always been a concern of taxpayers and Chinese tax authorities. Especially, after the new Double Taxation Agreement ("DTA") between Germany and China becoming effective from January 1, 2017, the German investors are eligible for a reduced withholding tax rate of 5 % on profit distribution, if certain preconditions and criteria of "beneficial owner" are fulfilled. Many German investors have taken measures to implement effective and optimized equity structure. The Notice No. 30 issued in 2012 by the Chinese State Administration of Taxation ("SAT") specified the criteria of "beneficial owner". No-tice 30 indeed has effectively prevented the abuse of tax treaties, nevertheless some problems still arose in practice, especially with regard to the holding structure which are commonly used by German investors. On February 3, 2018, the SAT finally published the Announcement No. 9 on "Issues Related to Beneficial Ownership in DTAs" ("the Announcement"), which allows the applicants without treaty abuse purpose to enjoy the treaty benefit.




Loosened Beneficial Ownership Conditions on Treaty Benefit Application

The most significant change in the Announcement is loosening the beneficial ownership conditions for treaty benefit application. Before the Announcement was issued, the local tax authorities in principle do not accept the application of treaty benefit if the applicant can meet neither the criteria of beneficial owner nor the safe harbor requirement. That resulted in a situation that many applicants were not eligible for beneficial ownership due to their business arrangement of using a holding structure. According to the previous regulation, even if the holding company is established with commercial purpose and its parent company holds commercial substance, the dividends it receives from China cannot “pass through” the holding company to enjoy the preferential tax rate according to the tax treaty between the host country of the upper shareholder and China. The Announcement offers new possibilities for enterprises investing in China through holding structure to apply for tax treaty benefits.


According to the Announcement, the applicant shall be deemed to have beneficial ownership even if the applicant itself does not meet the assessment criteria as beneficial ownership, if BOTH of following preconditions are met:

  • Shareholders who directly or indirectly hold 100 % shares of the applicant meet the requirements of beneficial owner;
  • Shareholders directly or indirectly holding 100 % shares of the applicant are residents of the applicant's country (“same country rule”); or although the shareholders are not residents of the applicant's country, both the shareholders and the intermediate shareholders in the case of an indirect holding are qualified persons (“same DTA benefit rule”).


Above mentioned "qualified person” means that the treatment under the treaty between China and the country/region of its residence equals to or is more favorable compared with that under the applicable treaty of the applicant, when it receives dividends from China.


It is worth noting that in the case of application of “same country rule”, there is no additional requirement regarding the treaty treatment in the country where the intermediate shareholders are located. That means, as long as the applicant and the beneficial owner are the tax resident of the same country, the applicant can apply for treaty benefit even if the withholding tax rate on dividends is higher in the treaty between China and the country of the intermediate shareholder.


In addition, the Article 10 of the Announcement provides that "although the applicant has the beneficial ownership, the general anti-tax-avoidance rules shall be applied, if the competent tax authorities find it necessary to perform the Principal Purposes Test (“PPT”) according to the treaty or the anti-avoidance measures under domestic laws." How the local tax bureau will use this provision in practice is to be clarified according to further practice and implementation details.


Extended Scope of the Safe Harbor

According to previous regulation, if the treaty applicant is a stock listed company in the contracting country, or a subsidiary 100 % directly or indirectly owned by a stock listed company in the same contracting country, and the dividends are derived from the shares held by the abovementioned stock listed company, the applicant will be deemed as beneficial owner by default.


In the Announcement, the SAT extends the Safe Harbor scope to "the government, the stock listed company or the individual resident in the contracting country". Meanwhile, if 100 % shares of the applicant are held by the government, the stock listed company or the individual resident in the contracting country, the applicant can also be directly recognized as beneficial owner by default.


However, according to the Sino-German DTA, the preferential tax rate of 5 % applies only to corporations (partnerships excluded) that directly hold more than 25 % shares of the enterprises distributing the profits. Thus, even if the applicant is an individual German resident and can be recognized as beneficial owner, he/she can only enjoy a preferential tax rate of 10 % under the treaty (individual income tax rate on dividend in-come under domestic law is 20 %). In the context that the applicant is a German corporation failing to pass the assessment of beneficial ownership and its 100 % shareholder is a German individual, the Announcement confirms the enterprise will be directly deemed as beneficial owner without further assessment. However, the Announcement does not specify which tax rates will apply (as corporation or individual) under this scenario. We expect that can be clarified in practice soon.


Assessment Criteria of Beneficial Owner

The Announcement also makes two changes to the unfavorable facts regarding the assessment of the beneficial owners of applicants:


  • The Announcement stipulates that it would be detrimental to the identification of the beneficial ownership if the applicant has obligation to remit more than 50 % of received dividends to resident in third countries within 12 months upon receiving the dividends. Thereof, the term "obligation" refers to both the situation where contractual obligations for remittance exist and the situation in which the remittance is actually completed despite the absence of any contractual obligation.
  • According to the Announcement, the fact that the business activities engaged by the applicant do not constitute substantive business activities will be detrimental to the identification of the beneficial ownership of the applicant. Substantive business activities include substantial manufacturing, distribution, management and other activities. Whether the business activities of the applicant are substantive should be assessed based on their actual functions performed and risks assumed. As for whether the investment holding management activities can be determined as conducting substantive business activities, the official interpretation of the SAT further explains that the assessment should be based on whether the applicant is engaged in pre-investment research, evaluation and analysis, investment decision, investment implementation and investment follow-up management.


Application Documents

Since the Announcement loosens the conditions of beneficial ownership during the application for treaty benefit, the requirements on application documents have also changed accordingly compared with those stipulated in Notice [2015] No. 60.


  • Apart from its own tax residence certificate, the applicant should also provide the tax residence certificate issued by the competent tax authority of the country where the qualified beneficial owner and the relevant qualified per-sons reside;
  • The tax residence certificate shall be issued to prove the tax residence identity for the year or the previous year in which the dividend is distributed.


Our Observation

In practice, establishing holding companies in Singapore or Hong Kong as the direct shareholders of a Chinese foreign-invested enterprise are very commonly seen in business arrangement. However, it has been encountered many difficulties in applying for treaty benefits due to the holding company is usually not injected with sufficient business substance. The Announcement has laid out the fundament to solve the problem. Nevertheless, the requirements on documents to identify the "beneficial ownership" are increased, when applying for treaty benefits. It can be said that more applicants that have neither intentions nor consequences of abusing treaty benefits are allowed to be included in the assessment of beneficial owner identity, while the criteria of assessment have been made even tighter.


It is worth to note that the Announcement will take effect from April 1, 2018, and it is not clarified whether it applies to cases happened in previous years or not. The Announcement also stipulates that every level within the qualified organizational structure shall always fulfill the requirement on shareholding percentage, which is set as 100 %. In addition, the submission of tax resident certificates of every relevant entity within the structure is still a precondition for the successful application of treaty benefit, even though the loosened conditions are applicable. Therefore, it is suggested that the companies should prudently assess their eligibility for treaty benefit in the context of the new regulation, plan the timing of dividend payment and also make the necessary adjustment on the corporate structure if possible.



Vivian Yao


+86 21 6163 5200
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Frances Gu

Associate Partner

+86 21 6163 5238

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