On February 10, 2010, the Government of Barbados and the Government of the People’s Republic of China concluded a new protocol to amend the existing agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (hereafter referred to as the “old DTA”) that was signed on May 15, 2000. The new protocol will become effective after ratification by both countries.
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Key Changes under the New Protocol |
| 1. Dividends |
Under the new protocol, the withholding tax rate on dividends is now reduced from 10% to 5%, if the Barbados investor holds 25% or more of equity interests of the Chinese company paying the dividend. In all other cases, a 10% withholding tax rate will be applied.
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| 2. Capital Gain |
Under the old DTA, capital gains derived from the sales of equity interests in a Chinese company by a Barbados resident company is exempt from paying a withholding tax of 10%. However, under the new protocol, China now has taxing rights in the following situations:
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if more than 50% of the value of equity interests disposed is derived, directly or indirectly, from immovable property situated in China; OR
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if the Barbados investor’s shareholding in the Chinese company is at least 25% during the 12-month period before the date of alienation.
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In other words, under the new protocol, an exemption from paying Chinese tax on capital gains derived by a Barbados investor from the disposition of equity interests in a Chinese company will only be available provided that: (a) the Barbados investor’s shareholding in the Chinese company is less than 25% during the 12-month period before the disposition of equity interests; AND (b) no more than 50% of the value of equity interests disposed of is derived, directly or indirectly, from immovable property situated in China. |
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| 3. General anti-avoidance rules (GAAR) |
GAARs are not available under the old DTA whilst the new protocol contains an anti-avoidance provision that allows each treaty party to apply its domestic tax regulations and measures to combat tax avoidance. |
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The PRC tax authorities may rely on this provision to deny or override treaty benefits based on the application of general anti-avoidance rules stipulated in the new PRC corporate income tax law and regulations that became effective on January 1, 2008. |
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| 4. Exchange of Information |
The Exchange of Information (EoI) Article in the old DTA adopted the 1977 OECD Model Tax Convention whilst in the new protocol the EoI Article has been updated to follow the 2005 OECD Model Tax Convention, which is more comprehensive and extensive. |
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| What are the Impacts after the New Protocol? |
Until now, because of the favourable capital gains article stipulated in the old DTA, Barbados has been favoured by foreign investors considering investments into Chinese companies holding real estate. With the new protocol, we believe that Barbados will become less attractive to some MNCs as their preferred intermediate holding vehicle jurisdiction to hold their PRC investments.
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MNCs that adopt Barbados as the special purpose holding vehicle for their investments into China should evaluate the impact of changes immediately. In addition, the foreign investors that adopt Barbados as the holding vehicle should take into account the impact of a tax notice, Guoshuihan [2009] No. 698 (Circular 698), issued by the State Administration of Taxation. Circular 698 addresses the PRC tax on capital gains arising from the sale of an offshore intermediary holding company owning a Chinese resident enterprise (i.e., an indirect transfer). |
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| Our Initial Suggestions |
Under the prevailing China treaty network, there are still a few tax treaties under which China does not have taxing rights over capital gains from the disposal of equity interests of property-rich Chinese companies (i.e., where more than 50% of the value is derived, directly or indirectly from immovable property situated in China). Those jurisdictions include Venezuela, Belarus, and Armenia. Nevertheless, these jurisdictions are not commonly adopted by MNCs for holding their PRC investments.
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There are also a few tax treaties where China does not have taxing rights on the disposal gains of equity interests in non-property-rich Chinese companies. Those jurisdictions include Ireland and Switzerland.
A direct transfer of equity interests in the PRC investment requires going through an onerous approval process. Further to the issuance of Circular 698, both direct transfer and indirect transfer could have PRC tax exposures on capital gain. |
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In light of the above, we offer the following initial suggestions for foreign investors who currently adopt Barbados, or will do so in the future for holding their PRC investment. Please note that our suggestions are also applicable to jurisdictions other than Barbados, but will at all times need to be confirmed with tax and legal opinions. |
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Option 1 |
The Barbados SPV can dilute its shares and issue a new slot of shares to the buyer. The existing owner of the Barbados SPV will be deprived of dividend entitlement and the voting right. Instead of transferring the shares in the Barbados SPV from the existing owner to the buyer, the buyer obtains the ownership in the Barbados SPV that holds the PRC investment by holding the new slot of shares. This option is viable under group restructuring. |
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Option 2 |
Holding the existing Barbados SPV through an existing fund with segregated classes of shares. Instead of transferring the shares of the existing Barbados SPV, the new buyer merely acquires the class of shares from the fund. |
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| Option 3 |
The existing owner will list the existing Barbados SPV in an offshore public stock exchange such as the stock exchange in Curacao. The buyer will acquire the listed shares of Barbados SPV through an exchange custodian. Gains derived from buying and selling of shares listed in public stock exchanges are explicitly excluded from the scope of Circular 698. (Whether an offshore public stock exchange will be recognized for this purpose may possibly be subject to the interpretation of the local tax authorities). |
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| Option 4 |
Holding the existing Barbados SPV through a trust. The existing owner will become one of the beneficiaries of the trust, and transfer its entitlement to the buyer. Instead of transferring the shares of the existing Barbados SPV, there is only a change in the beneficial ownership in the trust. |
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| How Amicorp Can Assist |
The Amicorp Group is specialized in establishing and managing all types of corporate entities. With over 500 specialists in 24 offices in 20 jurisdictions, all supporting services in connection with company management and administration are provided including: the appointment of company secretaries, managers and directors, a registered address, preparation and maintenance of corporate records, bookkeeping, accounting and financial transactions, including the administration and management of bank accounts. Amicorp establishes SPVs, Funds and Trusts for clients, or allows clients to utilize existing vehicles with substance in their corporate structuring. |
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Amicorp does not provide legal or tax advice. Amicorp works on the basis of a lawyer’s or tax advisors’ structuring advice. |
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For further information please contact any of our staff below: |
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Derk Scheltema
Amicorp Shanghai |
| d.scheltema@amicorp.com |
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Kit-wah Poon
Amicorp Hong Kong |
| c.poon@amicorp.com |
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| Careen A. Byfield-Leyshon |
| Amicorp Barbadaos |
| c.leyshon@amicorp.com |
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