The promulgation of Circular No.698 Guoshuihan 2009

　　On December 10， 2009， the State Administration of Taxation (SAT) promulgated the Circular on Regarding Strengthening the Administration of Income Tax of Sale of Shares by Non-Resident Enterprises〔y1〕(Guoshuihan 〔2009〕698) .

　　Provisions in Circular No.698 clearly addresses that prevent the foreign enterprises from evading income tax obligation by indirect transfer of shares of Chinese resident enterprises through arrangements like abusing the corporate governance.

　　In accordance with the provisions in Circular No.698， foreign investor whose indirect transfer of Chinese residence enterprises falling into the following two catalogues:

　　(1) The real tax burden rate of the jurisdiction where the offshore holding company transferred is incorporated is less than 12.5%; or

　　(2) The jurisdiction where the offshore holding company transferred is incorporated does not acquire income tax from foreign-sourced income.

　　shall submit the relevant documents as below to the local taxation bureau where the Chinese domestic enterprises being transferred located within 30 days after the execution of Share Transfer Agreement to prove the aforesaid indirect share transfer is for reasonable commercial purpose.

　　(1) Share Transfer Contract or Agreement.

　　(2) The relationship between Foreign Investors and Offshore Holding Companies transferred by Foreign Investors regarding finance， operation， purchase and sale， etc;

　　(3) The situation of the operation， personnel， finance， property of the offshore holding companies transferred by foreign investors;

　　(4) The relationship of the offshore holding companies transferred by foreign investors and Chinese domestic enterprises regarding finance， operation， purchase and sale， etc.