China Issues New Tax Treaty Guidance for Nominee and Land Rich Holdings

January 1, 0001


On the last day of 2012, the PRC State Administration of Taxation (the “SAT”) issued a new interpretative circular on the capital gain provisions found in its tax treaties. The circular is entitled SAT Bulletin on Relevant Issues Relating to the Capital Gain Provision in Tax Treaties, SAT Bulletin [2012] No. 59 (“Bulletin 59”). Bulletin 59 supplements and updates a prior key tax treaty related circular issued by the SAT in 2010[1] (“Circular 75”) and provides further guidance with respect to the applicability of benefits under the capital gains provision.


In most of tax treaties entered into with China, capital gains arising from the sale of shares of a treaty resident company can be exempted from tax provided that the following two tests can be satisfied: (i) the target company is not a “land rich” company (i.e., 50% or more of the share value of the company consists directly or indirectly of immovable property) (“Land Rich Test” ); and (ii) the transferor company holds directly or indirectly less than 25% of shares of the target company (“25% Shareholding Test”).

Land Rich Exception

Bulletin 59 clarifies three technical points about the “land rich” exception under Circular 75. It provides that the scope of “immoveable property” includes operational or non-operational housing properties, land use rights, and attached fixtures. In addition, Bulletin 59 further describes the meaning of the “three-year look-back period” with respect to the proper determination date (or dates) which should be used to apply the 50% test to be the 36 consecutive calendar months prior to the month of the share transfer. While the value of immovable property could be determined based the current PRC accounting standards of assets (without taking into account debts or other liabilities of the company) in accordance with the provisions provided by Circular 75, Bulletin 59 clarifies that the value of land or land use rights that are included in the relevant immoveable property cannot be lower than the market price of the property in the same or similar location.

Nominee Holdings

The most significant aspect of Bulletin 59 is that it introduces a look-through concept for the 25% Shareholding Test. According to Bulletin 59, if a Singapore resident indirectly owns the equity interest of a PRC company through a nominee, but exclusively enjoys the participation interest of the equity, and substantially bears equity investment risks of the PRC company, the Singapore resident can be treated as if it holds the equity interest of the PRC company directly for purposes of the 25% Shareholding Test. The nominee includes individuals, companies or other entities. This look-through concept could be used favorably in the event the nominee is located in a jurisdiction without tax treaty protection while the beneficial owner does. However, it could also be used unfavorably to attribute more than 25% to a treaty resident. In either case, Bulletin 59 does not provide any procedural guidance with respect to how to apply for such look-through treatment and what documents or information are needed to support the nominee claim by the applicants. Bulletin 59 also provides more detailed guidance for the indirect shareholding percentage calculation under the 25% Shareholding Test. For example, it requires that at least 10% ownership in a subsidiary is required to attribute indirect interests held by that subsidiary. Indirect attribution rules for individuals through relatives is also addressed by Bulletin 59.

Click here to read the bi-lingual translation of Bulletin 59.


[1] Guoshuifa [2010] No. 75


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