APAC Tax Matters: 12th edition
At a glance
- Issues relating to “Capital Gains” in the China-Singapore income tax treaty
- Adjustment of the “Catalog of imported commodities without Tax Exemption for domestic investment projects”
- Commencement of inspection on the recognition and administration of High-and-New Technology Enterprises (“HNTEs”)
- Implementation measures in respect of customs duties for 2013
Notice regarding certain issues relating to the article on “Capital Gains” in the China-Singapore income tax treaty (SAT Announcement  No. 59)
On 31 December 2012, the State Administration of Taxation (SAT) released SAT Announcement  No. 59 (“Announcement 59”) clarifying certain issues related to the double tax agreement (DTA) entered into between China and Singapore (the “China-Singapore DTA”) and Guoshuifa  No. 75 (“Circular 75”) regarding the interpretation of provisions in the China-Singapore DTA.
Announcement 59 also specifies the calculation of the percentage of a participation in the capital of a Chinese resident company as well as the scope of group members which have significant interest relationships with the Singaporean resident.
On 26 July 2010, the SAT issued Circular 75 which sets out interpretations for the provisions (including the article on capital gains) in the China-Singapore DTA. Announcement 59 makes certain changes to the interpretation of the provisions related to capital gains in Circular 75 and are worth the attention of taxpayers from the following perspectives:
- Scope of applicability of Announcement 59
Pursuant to the interpretations of Announcement 59 by the SAT, Announcement 59 is also applicable to other DTAs that China has entered into if their articles of capital gains are consistent with that of the China-Singapore DTA.
- Difference regarding immovable property stipulated in the China-Singapore DTA and Circular 75
There is no difference in the definition of immovable property stipulated in Articles 6 and 13 of the China-Singapore DTA and Circular 75. Such immovable property shall include land use rights and structures such as buildings for operational or non-operational purposes as well as the property attached to the immovable property.
- Calculation of the percentage of share value coming from immovable property situated in China
Pursuant to Announcement 59, the accounting value shall generally be adopted in determining the value of assets and immovable property. However, adjustments to the above value according to the comparable market price of land or land use rights are required if their accounting value is less than the comparable market price. An example of how to calculate the percentage of share value coming from immovable property situated in China is illustrated as follows:
Items Figures Remarks Total assets 68,800 A = B+C+D ► Buildings 15,000 B ► Land use rights 13,800 C* ► Non- immovable property 40,000 D The percentage of value of shares deriving from immovable property situated in China 42% (B+C)/A×100%
Items Figures Remarks Purchase price 1/m2 E Area 15,000 m2 F Depreciable life 50 years G Depreciated years 4 years H Carrying value 13,800 C = E×F(1-H/G)
Calculation of the percentage of share value deriving from immovable property according to the following adjusted data:
Items Figures Remarks Market price of comparable land 2/m2 I Adjusted carrying value of land use rights 27,600 J = I×F(1-H/G) The percentage of value of shares deriving from immovable property situated in China 52% (B+J)/(B+J+D)
Note: figures in the above tables are expressed in RMB’000 unless otherwise specified.
- Calculation of a percentage of a participation in the capital of a Chinese resident company
Pursuant to the China-Singapore DTA, gains derived by a Singapore resident from the alienation of shares, participation, or other rights in the capital of a Chinese resident company may be taxed in China if the recipient of the gains, at any time during the 12-month period preceding such alienation, had a participation, directly or indirectly, of at least 25% in the capital of the Chinese resident company.
Foreign investors and foreign investment enterprises which are conducting or intend to conduct share transfer transactions should study Announcement 59 carefully and consider its impact and how it would affect their possible restructuring plans. When calculating the percentage of the value of shares deriving from immovable property situated in China and the percentage of participation in the capital of a Chinese resident company, provisions in Announcement 59 and Circular 75 should be observed.
You may click this link to access:
- the full content of Announcement 59
- the full content of the Interpretations of Announcement 59
- the full content of Circular 75