The Relationship between China's Tax Treaties and Indirect Transfer Antiavoidance Rules

Abstract

China has been actively applying its general antiavoidance rule since its introduction on January 1, 2008. One of China’s well-known antiavoidance measures is Guo Shui Han [2009] No. 698 (Circular 698), which taxes indirect transfers. Indirect transfers arise when a non-P.R.C. resident company transfers shares in a non-P.R.C. resident holding company (offshore holding company) that holds shares in a P.R.C. resident company.

This article discusses whether Circular 698 is compatible with the provisions of China’s tax treaties, particularly article 13(5) of the U.N. model income tax treaty. The OECD and U.N. commentaries state that generally, there is no conflict between domestic antiavoidance rules and the provisions of tax treaties. Some commentaries even state that Circular 698 is compatible with article 13(5) of the U.N. model under either a factual approach or an interpretative approach.

This article argues that both a factual approach and an interpretative approach fail to address Circular 698’s compatibility with China’s tax treaties. There is a consistency between article 10(2) and article 13(5) of the U.N. model, and both article 10(2) and article 13(5) will apply to the form of the pertinent transaction rather than its substance. In other words, no look-through of the offshore holding company is allowed under either article 10(2) or article 13(5) of the U.N. model.

Keywords: Indirect Transfers, Circular 698, Tax Treaties, Antiavoidance Rules

JEL Classification: K34, K20, H26