The document discusses China's Circular 698 tax policy on capital gains from offshore share transfers by non-resident companies. It outlines two situations - direct transfers of Chinese company shares and indirect transfers via an offshore holding company. For direct transfers, the capital gain is taxed at a 10% withholding tax rate. For indirect transfers, the offshore holding company must demonstrate a valid commercial purpose or its existence may be denied and the transfer treated as direct, also facing a 10% tax. The document also provides a case study of the Jiangdu tax bureau applying Circular 698 to tax a US investment fund's capital gain from selling its Chinese joint venture stake through a Hong Kong subsidiary.

1. Tax on Capital Gain from Share Transfers by Non-Resident Companies Mar 31, 2011 Beijing 北京 Shanghai 上海 Tianjin 天津 Guangzhou 广州 Chengdu 成都 Hongkong 香港 Taipei 台北 Singapore 新加坡 NewDelji 新德里 Copenhagen 哥本哈根 Zurich 苏黎世

12. Case study – Jiangdu case Beijing 北京 Shanghai 上海 Tianjin 天津 Guangzhou 广州 Chengdu 成都 Hongkong 香港 Taipei 台北 Singapore 新加坡 NewDelji 新德里 Copenhagen 哥本哈根 Zurich 苏黎世 Timeline Progress (step by step) In early 2009 Jiangdu tax authority learnt from a JV i.e. Company C during a common tax administration review, that its foreign investor Company A may want to dispose its shares in the JV through an indirect offshore share transfer. As there is no tax regulations on the indirect share transfer, Jiangdu tax authority reports this case to the State Administration of Taxation (“SAT”). 10th Dec. 2009 SAT released Circular 698 to clarify the taxation on indirect offshore share transfer. 14th Jan, 2010 Company A transferred its shares of Company B to a US buyer, and obtained the huge amount of capital gain. 18th May, 2010 After several rounds of meeting and negotiation, Company A agrees to pay tax of RMB173 million (equivalent to USD25.4 million ).

13. Case study – others Currency: RMB Beijing 北京 Shanghai 上海 Tianjin 天津 Guangzhou 广州 Chengdu 成都 Hongkong 香港 Taipei 台北 Singapore 新加坡 NewDelji 新德里 Copenhagen 哥本哈根 Zurich 苏黎世 City in China Transaction Time Capital gain Withholding income tax (WHT) Da Lian Mar 2009 860.0 million 60.50 million He Nan July 2009 115.5 million 10.09 million Xiao Shan Aug 2009 31.2 million 3.12 million Liao Ning Dec 2009 11.2 million 1.12 million Zhe Jiang Apr 2010 101.7 million 10.17 million