In 2014, with the increasing scale and number of Chinese companies making investments abroad, the State Taxation Administration (STA) introduced Announcement No. 38. This required regular reporting on outbound investments and annual reporting of income earned overseas. The reporting requirements apply to PRC tax resident enterprises, as well as those non-PRC tax residents that have an establishment or a place of business in China and derive overseas income that is effectively connected with such establishment or place of business.
Recently, the STA issued Announcement No. 17, titled: "Announcement on Optimizing Tax Services and Simplifying Reporting Requirements for Resident Enterprises Regarding Overseas Investments and Income Information." This announcement simplifies the reporting obligations for resident Chinese enterprises when it comes to their overseas investments. This is part of the ongoing efforts to cut red tape in the tax field and to improve tax services.
Compared to Announcement No. 38, Announcement No. 17 makes the following improvements:
Reducing the number of reporting forms: announcement No. 17 combines the "Report on Resident Enterprises' Investments in Foreign Companies" and the "Report on Controlled Foreign Companies" from Announcement No. 38 into a single report named "Report on Resident Enterprises' Overseas Investment Information";
Reducing reporting frequency: investment reporting is no longer required at the time of corporate income tax (CIT) prepayment and is now just needed at time of the annual CIT filing. This significantly reduces the number of times enterprises need to report such information; and
Simplifying data entry: the data items required to be reported has been reduced from 57 to 28, making it easier for taxpayers to complete the report.
In the official interpretation of Announcement No. 17, the STA further sets out examples illustrating which enterprises shall fulfil the reporting obligation:
A case is highlighted of a foreign enterprise that is directly (and indirectly) held by multiple tiers of PRC tax resident enterprises (i.e., PRC Co A holds PRC Co B, and then PRC Co B holds PRC Co C, which in turn holds the foreign enterprise). If the PRC resident enterprise’s holdings in the issued equity capital or voting rights of the foreign enterprise’s shares exceed 10% at any point during the tax year, then the reporting needs to be completed by the resident enterprise which directly holds the foreign enterprise (i.e., PRC Co C); and
Where a resident enterprise holds the issued equity capital or voting rights in a foreign enterprise through a Chinese partnership, and reporting is required, then the partners themselves have the reporting obligation. For instance: PRC Co A and PRC Co B hold shares in Foreign Co D through Chinese Partnership C. PRC Co A is entitled to 60% of the equity and profit distributions arising from the partnership. The partnership holds 20% of Foreign Co D's shares. Resident Company A is considered to hold 12% (60% × 20%) of Foreign Co D's shares and should complete the reporting. The partnership is not required to complete the reporting.
Special rules apply to determine if the 10% threshold is exceeded:
Where multiple tiers of ownership are involved, the holding of the shares is determined by multiplying the shareholding percentages at different tiers. However, If the intermediate holding is more than 50% of the shares, it will be calculated at 100%. Where PRC Co A 100% holds Foreign Co B, which in turn 60% holds Foreign Co C which in turn 10% holds Foreign Co D, PRC Co A is considered to hold 10% (100% x 100% x 10%) of Foreign Co D. Then PRC Co A should complete the reporting for Foreign Co B, C and D; and
If an ownership transfer occurs within a tax year and results in the year-end ownership of the foreign enterprise falling below 10%, the reporting of the foreign enterprise is still required.
Announcement No. 17 also requires resident companies to self-determine whether an overseas invested enterprise qualifies as a controlled foreign company and to report relevant information. Announcement No. 17 comes into effect from October 10, 2023, and will apply to information to be reported for fiscal years starting from 2023 and beyond.
The Chinese government is committed to reducing the tax burden on enterprises making outbound investments. Tax treaties have been proven to provide strong support in eliminating double taxation, providing tax certainty, and resolving tax disputes in this regard. China has continuously expanded its tax treaty network and as a further effort, it recently signed new tax treaties with Senegal and Cameroon. This brings China’s tax treaty network to 114 jurisdictions, further covering major destinations for outbound investments for Chinese enterprises.
