Issues Affecting Cross-Border Mergers and Acquisitions in China

Along with the rapid development of China's economy in recent years, there has also been an increase in inbound and outbound investments by both domestic and foreign investors, as well as corporate restructuring transactions to improve the operational efficiencies of these investments. kashgar border transfer special purpose vehicle  was the most common structure used by foreign companies to hold direct investments in China. An SPV is a holding company set up by a foreign investor outside of China – usually in Hong Kong or other locations that boast notable tax advantages and favorable tax treaties with China – for the special purpose of holding equity interest in an onshore foreign-invested enterprise One of the advantages of using an SPV is that it may benefit from preferential withholding tax rates on dividends and other passive income under the tax treaties between China and the jurisdiction in which the SPV is located.

For example, Hong Kong's double tax agreement with China reduces the withholding tax rate on dividends from 10 percent to 5 percent. In addition, the jurisdiction in which the SPV is located usually imposes low, or even zero, capital gains taxes on income from equity transfers. When the foreign investor disposes of the investment in China by transferring equity in the SPV , the transfer is also technically exempt from capital gains taxes in China since both the seller and subject matter are located offshore.A general anti-avoidance rule was first introduced in China under the CIT Law which came into effect in 2008. silk road group tour GAAR empowers Chinese tax authorities to make reasonable adjustments where an enterprise implements an arrangement without reasonable business purposes in order to reduce its taxable income or profit. The CIT Law's Implementing Rules provide that “an arrangement without reasonable business purpose” refers to an arrangement which has the main purpose of obtaining tax benefits such as the reduction, elimination, or deferral of tax payments.