A major platform company has been mandated to settle 547.9 million yuan in back taxes for cross-border tax avoidance. Experts caution that cross-border structure design must align with genuine commercial substance.
Previously, the financial report of a well-known domestic social platform's parent group disclosed a required tax payment of 547.9 million yuan, becoming a hot topic within the industry. The company's Hong Kong intermediate holding company was deemed by tax authorities not to meet the characteristics of substantive business activities. Consequently, its status as a "beneficial owner" was denied, making it ineligible for the preferential 5% withholding tax rate on dividends under the Mainland and Hong Kong Special Administrative Region Arrangement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income. Instead, it is required to pay tax at the standard 10% rate stipulated by mainland tax laws. As a result, the company paid 356.1 million yuan in back taxes on distributed dividends and accrued an additional 191.8 million yuan in withholding tax for dividends yet to be distributed.
Several experts point out that in the current global wave of anti-tax avoidance, cross-border structures that are merely "formally compliant" for tax avoidance are no longer viable. The design of such structures must correspond to real commercial substance.
In recent years, with the acceleration of global economic integration, Chinese domestic enterprises often opt for red chip structures when engaging in cross-border financing, expanding into international markets, or preparing for overseas listings. In simple terms, this involves a domestic company establishing multiple layers of offshore companies in jurisdictions like the Cayman Islands, the British Virgin Islands (BVI), and Hong Kong to facilitate overseas listing or financing. These offshore companies then hold the domestic operating entity, forming a model of "overseas holding, domestic operation."
It is understood that to provide tax certainty for cross-border business and avoid double taxation, China has negotiated and implemented tax treaties or arrangements with 114 countries or regions. Specifically, according to the Mainland-Hong Kong tax arrangement and the relevant State Taxation Administration announcement on the "beneficial owner" in tax treaties, if a Hong Kong resident enterprise holds more than 25% of the shares in a mainland resident enterprise and meets the "beneficial owner" conditions, dividends paid by the mainland company can enjoy a preferential 5% tax rate. Otherwise, the standard 10% rate under mainland tax laws and regulations applies.
Experts warn that while this policy arrangement is an international practice aimed at reducing the cross-border investment tax burden for qualifying enterprises and promoting bilateral investment and economic exchanges, it has been misused by some companies for tax avoidance purposes.
According to experts, when setting up a "tax haven—Hong Kong—mainland" structure, companies often establish an intermediate holding company in Hong Kong and apply for the preferential dividend tax rate under the Mainland-Hong Kong arrangement. However, in some corporate groups, these intermediate companies have limited personnel, assets, and functions, lack the characteristics of substantive business activities, fail to meet the "beneficial owner" criteria, and thus cannot enjoy the preferential treaty rates.
"Tax authorities follow the principle of 'substance over form' when determining 'beneficial owner' status," explained Luo Chaoping, a professor at the School of Economics and Management, Southwest University. According to the aforementioned STA announcement, a "beneficial owner" refers to the person who has ownership and control over the income or the rights or property from which the income is derived. Agents or designated recipients are not considered "beneficial owners." The announcement lists several factors unfavorable for determining an applicant's "beneficial owner" status, such as: the applicant is obligated to pay more than 50% of the income received to a resident of a third country (region) within 12 months; the applicant's activities do not constitute substantive business operations; the applicant's country (region) does not tax or exempts the relevant income, or imposes an extremely low tax rate; or the existence of other contracts with terms similar to loan or royalty agreements.
Luo Chaoping stated that in China, the substantive business activities standard is a key criterion for determining the "beneficial owner" under tax treaties. The STA announcement clearly defines substantive business activities, which include substantive manufacturing, distribution, management, and other activities. This means tax authorities will increasingly focus on the substance of business operations, conducting a comprehensive analysis combining factors like corporate ownership structure, personnel allocation, fund flows, decision-making mechanisms, and risk assumption to address the risk of treaty abuse.
"Beyond setting up intermediate companies to improperly access treaty benefits, other common cross-border tax avoidance behaviors also warrant vigilance," said Hu Yuancong, a professor at Southwest University of Political Science & Law and Director of the China Market Economy Rule of Law Research Center. Unreasonable pricing in related-party transactions is another typical form of cross-border tax avoidance. Companies use red chip structures to manipulate transaction pricing between related parties, artificially inflating domestic costs and suppressing profits, thereby shifting profits from China to overseas "tax-free havens," resulting in "losses in high-tax countries, profits in low-tax havens" to minimize overall tax liability.
Utilizing cross-border structures for tax avoidance essentially constitutes cross-border tax base erosion, posing risks of capital flight and asset concealment, leading to losses in domestic public finances and severely undermining fair market competition. Furthermore, some multinational enterprises evade taxes through methods like concealing overseas income, fabricating costs and expenses, falsifying accounting books and invoices, or making false declarations of identity. These actions are fraudulent in nature, constitute tax-related violations, and will face legal consequences.
"In the current environment, compliance equals safety," emphasized Hu Yuancong. In recent years, the deepening implementation of Base Erosion and Profit Shifting (BEPS) action plan measures and the Common Reporting Standard (CRS) for automatic exchange of financial account information in multiple countries and regions, combined with China's domestic anti-avoidance legal framework, has formed a tight cross-border tax supervision network. Cross-border tax evasion through structure design, profit shifting, or income concealment will find no place to hide. Multinational enterprises should thoroughly evaluate from the perspectives of structure design and operational substance, reasonably establish structures, substantiate the substance of overseas entities, and standardize the pricing and management of related-party transactions. Simultaneously, they must strictly adhere to legal boundaries, comply with laws, and pay taxes in good faith. Only in this way can they effectively mitigate tax-related risks and achieve long-term, stable development in the international market.
Comments