China Targets Equity Transfers by Nonresident Investors
By Alexander M. Lee And Maggie Mouradian
On December 10, 2009, Chinas State Administration of Taxation (SAT) issued a circular that addresses equity transfers by foreign investors. The circular, Guoshuihan  No. 698 (Circular 698), applies retroactively to all transactions after 2007 and represents just another weapon that the Chinese tax authorities have wielded in their anti-tax avoidance combat. It addresses both (i) the direct sale of a Chinese investee company and (ii) the indirect sale of such an enterprise through the sale of shares in an intermediate holding company. The latter scenario has captured the most attention because it will have a significant impact on companies that use offshore holding vehicles for their investments in China.