China Business Insights: Determination of beneficial owner under the entrusted investment

The China Business Group prepared this alert based on information provided by the Grant Thornton International Ltd member firm in the People’s Republic of China, Grant Thornton China.
On April 21, 2014, the People’s Republic of China State Administration of Taxation (SAT) released the “Announcement of the State Administration of Taxation on the Determination of Beneficial Owner under the Entrusted Investment” (Announcement [2014] No. 24), which aims to stipulate the determination of a beneficial owner under an entrusted investment. This announcement becomes effective on June 1, 2014. In 2009, the SAT first issued Guoshuihan [2009] No. 601, which provides guidance on how a beneficial owner is determined for the purpose of tax treaty articles on dividends, interest and royalties. The SAT in 2012 issued supplemental guidance, “Announcement [2012] No. 30,” which provides clarification of beneficial ownership for income tax treaty purposes. Announcement [2014] No. 24 tales a further step in providing guidance on beneficial ownership.

Pursuant to Announcement [2014] No. 24, nonresidents can be qualified as beneficial owners and be eligible for the tax treaty benefits if the stipulated conditions are met, including those from Guoshuihan [2009] No. 601 and Announcement [2012] No. 30. The following summarizes the salient points in Announcement [2014] No. 24:

The definition of  “entrusted investment,” which applies under the new announcement
  • The "entrusted investment" refers to the fact that nonresidents directly entrust foreign professional organizations with the nonresidents' capital for the purpose of the investment in the equity or the creditor's right of resident enterprises.
  • "Foreign professional organizations" refer to the financial institutions licensed by the governments of their local countries or regions that are engaging in the securities brokerage, asset management and custody business for capital and securities.
  • The foreign professional organizations charge the service fee or the commission under the corresponding agreement of entrustment or commissioning. The profit and risk from the investment with the entrusted capital shall be earned or borne by the nonresidents.

    Documentation requirements for the application for determination of beneficial owner

    • Contracts or agreements related to the investment signed by all parties of the investment chain (including nonresidents, the investment managers, the custodians at all levels and the securities companies, etc.) and other information that can describe the investment business; the content of such information, which shall include the origin and the composition of the principal of the entrusted investment; and the agreement of all parties on the charging of fees or acquiring of profits.
    • Information and credentials relating to how the investment profit and other income returns to such nonresidents level by level, and the information to determine and classify the income.
    • Other information requested by the tax authorities to determine the beneficial owners.

    Factors that would be examined by the Chinese tax authority

    • If the income type of the investment is dividend or interest, the nature of which has not changed in the process of its returning to such nonresidents level by level, and there is evidence that the income has actually returned to such nonresidents, such nonresidents shall be determined as the beneficial owners of such income and may enjoy the benefits provided by the corresponding clauses of the tax treaty.
    • If the charged fees or acquired remunerations are related to the dividends or interest, such nonresidents are not the beneficial owners of that part of the fees or the remunerations, and part of the fees or the remunerations shall not enjoy the benefits.

    Simplified procedures of determination of beneficial owner

    • If the Chinese tax authorities determine that the nonresidents are the beneficial owners of the dividends and interest, when the nonresidents also received investment gains through the entrusted investment and met the specific conditions, they do not need to apply to the Chinese tax authority for determination of beneficial owner again for three years from the first day of enjoying the tax treaty benefits.

    Please contact any of the following professionals for details:
    Sandy Chu, Principal, National Leader — China Business Group
    Grant Thornton LLP
    666 Third Ave., 13th, Chrysler Center
    New York, NY 10017
    T +1 212.542.9970


    David Kim
    International Tax Services — U.S. Desk lead
    Grant Thornton LLP
    175 W. Jackson Blvd.
    Chicago, IL 60604
    T +1 312.602.8702

    Wilfred Chiu
    Head of Tax Services —Beijing
    Grant Thornton China
    10 Floor, Scitech Place, 22 Jianguomen Wai Ave.
    Chaoyang District Beijing 100004, China
    T + 86.10.8566.5828

    Rose Zhou
    Head of Tax Services — Shanghai
    Grant Thornton China
    45/F Raffles City, 268 Xizang Zhong Road
    Shanghai 200001, China
    T + 86.21.2322.0298

    This information is potentially subject to translation errors or omissions. It does not represent any type of tax advice whatsoever.

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