Updated: May 7, 2020
Thinking of changing ownership structures of your Wholly Foreign-Owned Enterprise (WFOE) in China?
This may not be as straight forward as you would expect in other commonly used holding jurisdictions.
Share transfers of a Chinese company from one foreign company to another foreign company most often have reporting obligations as well as certain minimum exposures to taxation and stamp studies, regardless of whether the transaction occurs within the same group, within the same chain of ownership or whether it is an arm’s length sale to a third party.
The three basic requirements for such share transfers involve:
Filing with Administration for Market Regulation ("AMR") to obtain a new business license of for the WFOE
Enterprise Income Tax ("EIT") and Stamp Duty ("SD") filing and payment (if applicable) with in-charge tax authority
Tax registration to notify the change of shareholder with the tax authority
The article below explains the 3 steps required in greater detail from a practical perspective.
1. Filing with Administration for Market Regulation ("AMR") to obtain a new business license of for the WFOE
Preparation of for the registration can typically take up to 3 weeks and the registration with AMR generally takes around 30 days after the Contemplated Transaction effective date.
Generally, the following steps need to be completed by a service provider:
Communicating with the in-charge government authorities on a name basis to understand the detailed filing requirements and formulating a step plan and information request list based on communications with the relevant authorities, to better facilitate the management of the Contemplated Transaction. In parallel, the WFOE to collect the necessary information/documents.
Review of the required documents for the filing with AMR.
Filing documents and communicating with the in-charge officials of AMR for any potential queries in relation to the filing.
Obtaining the relevant filing record (e.g. the updated Business License), if required.
Although the procedures of application for the pre-approval and renewal of registration with Commission of Commerce ("COC") are abolished from January 1, 2020, in-charge officials may require supplementary information/documents upon reviewing filing package with AMR.
2. Enterprise Income Tax ("EIT") and Stamp Duty ("SD") filing and payment (if applicable) with in-charge tax authority
China allows a special qualified special reorganization tax treatment will give a Company a relief of current EIT obligation on capital gain derived from the share transfer (i.e. income tax deferral), which is subject to in-charge tax authority's review and assessment.
However, based on group structure, the Contemplated Transaction would have to be a qualified share transfer "between Chinese and foreign parties" in Article 7 of Caishui  No.59, which requires a transfer of the shares of a Chinese company by a non-resident company to its wholly-owned non-resident subsidiary, for the special treatment to apply.
Where the special reorganization tax treatment is not applicable, the transferor will generally be exposed to pay 10% EIT on capital gains derived from the share transfer to in-charge Chinese tax authority pursuant to the State Administration of Taxation ("SAT")  Bulletin 37. Even under the China-Hong Kong double tax arrangement, this will still apply.
Transfers at Cost to Reduce Capital Gains
Whether transfer at cost is acceptable by the in-charge tax authority is quite complicated in practice even in Shanghai. The Chinese tax authority would generally require a valuation report to support the share transfer price, especially for the case of related party transaction. Even if the valuation result is equal or close to the cost of shares in the WFOE, local tax authority's application of tax administrative intent and practice may vary significantly.
Administrative Steps in Practice and Expectations on Length of Process
Typically, such processes involve iterated correspondences asking for more supporting documents (e.g. latest financial statements, explanation of the bona fide commercial purpose of the transfer etc.) and subsequent challenges to the proposal on Transfer Pricing grounds, with the onus of proof on the taxpayer as to whether the price is in line with arm's length principle.
Upon pre-assessment of the in-charge tax authority, the tax filing and payment will generally be done within 1~3 working days)
Enterprise Income Tax ("EIT") is filed and paid within 7 days upon the share transfer is completed. In practice, Stamp Duty ("SD") generally shall be filed and paid at the same day of EIT filing.
Recommended services would typically include:
Assistance in preparing an explanation letter to state the background information of the Contemplated Transaction and addressing the applicable tax treatment to the tax authority. The explanation letters have to be drafted in both Chinese and English - the Chinese version will be submitted to the in-charge tax authorities upon approval, while the English version is to facilitate an internal review.
Face-to-face discussions/meetings with the in-charge tax authorities to explain the Contemplated Transaction and to discuss any technical analysis, seek the tax authority’s view and pre-filing assessment.
Based on instructions from the in-charge tax authority and the management's decision, assist in preparing the tax filing package.
Submitting the tax filing package to the in-charge tax authorities upon approval.
Responding to the questions raised by the in-charge tax authorities based on their review of the packages.
Assist in the tax payment settlement, if required, and issuance of tax payment receipt (税收缴款) chopped by the tax authority to local finance personnel for further handling.
Indicative Professional Fees* To Expect From Network Members When Performing Reorganisations (USD)
Filings with AMR: 14-17k
Filing and payment with tax authority: 15-18k
Tax registrations to notify the change of shareholder: 1.5-3k
*Chinese Valuation Report to facilitate EIT filing Varies significantly based on financial statements
Scoping of Service Providers
It is generally recommended to engage professionals within our network who can provide a one-stop solution in relation to the Contemplated Transaction by leveraging past experience on similar matters and our good connections to the local government authorities.
3. Notification & Registration of change of shareholder (1~3 working days)
Tax registration to notify the change of shareholder of WFOEs generally occur around 30 days upon the registration with COC and AMR, which could be done simultaneously.
Typical steps to achieve this process can include communicating with the in-charge tax authority on a name basis to understand the detailed filing requirements and prepare an information request list to facilitate WFOE to collect the necessary information/documents. It is recommended that a review of the required documents is performed by an external professional before filing documents and communicating with the in-charge tax authority for any potential queries in relation to the filing.
*The above registration and filing procedures and timeline are based on our experience on similar matters and may vary due to the specific requirements from in-charge authority.
In terms of EIT filing, the in-charge tax authority may ask the taxpayer/withholding agent to submit supporting documents before allowing them to make a tax filing and payment. The tax amount should be assessed and confirmed by tax authority after they review the submitted documents. In practice, the tax authority may also request pre-discussion with taxpayer/withholding agent before the EIT filing and payment. Therefore, the timeline may depend on the communication progress with the tax bureau. Valuation report for the shares of WFOEs would generally be required by tax authority if it is a related party transaction.
Chinese Valuation Reports can only be issued by a certified China valuation firm, which can qualify tax authority's requirements, and also a Chinese version of other supporting documents (e.g. Equity Transfer Agreement, capital verification report etc.). Indicative fees above do not include the assistance with preparation of such a valuation report or translation of the documents for which is it is recommended to budget extra. * It is typical to assume that tax authority will not make extensive queries/documentation requests or raise unexpected challenges (e.g., on valuation). If these situations arise, service providers generally charge extra.