Supplementary tax rules for Notice 698 aim to restore certainty

In June, officials from the State Administration of Taxation (SAT) announced during a tax seminar hosted by Hong Kong’s Internal Revenue Department that the SAT will issue supplementary regulations to clarify the indirect transfer rules under Notice 698.

According to the SAT officials making the presentation, the supplementary regulations will cover three key issues.

First, the supplementary regulations will provide a safe harbour for internal reorganisations. The major criticism of Notice 698 since its issuance is that it is overly broad. Many legitimate internal reorganisations with reasonable commercial purposes have been caught by the notice. Under the supplementary regulations, some internal reorganisations might only be required to submit pre- and post-reorganisation organisational charts and a brief explanation of the reasonable commercial purpose of the reorganisation. These reduced filing requirements will be available to an internal reorganisation if: (i) the transferor and the transferee have at least 50% common ownership; and (ii) the ultimate offshore controlling party retains the same shareholding in the Chinese subsidiary after the reorganisation.

Business Law Digest is compiled with the assistance of Baker & McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker & McKenzie by e-mail at: Zhang Danian (Shanghai) danian.zhang@bakermckenzie.com