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Q11.About red-chip listings
The audit inquiry response shows:
(1) In April 2018, the issuer issued shares and convertible bonds to purchase 78.15% of the shares of Deli International held by Sharp Vision. The risk of an issuer being required to pay corporate income tax in China under Guo Shui Circular No. 7 is low because it has a reasonable business purpose;
(2) The Cayman Islands Economic Substance Law came into force on 1 January 2019. According to the special opinion issued by Cayman lawyers, the issuer is a "relevant entity" but has not carried out "relevant activities" in the Cayman Islands, and while maintaining the status quo, it is not required to comply with other requirements of the Cayman Islands Economic Substance Law except for the annual economic substance notification and annual economic substance report to the relevant Cayman authorities;
(3) The exercise of share options by Chen Shuquan, the former director of the issuer, may involve the cross-border transfer of foreign exchange funds, and it is impossible to verify whether he has gone through the relevant foreign exchange registration, and whether the shareholders of Yuyun Holdings have gone through the foreign exchange registration procedures in accordance with the law. According to the provisions of the Foreign Exchange Administration Regulations, if domestic foreign exchange is transferred overseas in violation of the regulations, or the foreign exchange registration management regulations are violated, the parties concerned may be given fines and other punishments.
Issuers are requested to:
(1) According to the specific provisions of the Cayman Islands Economic Substance Law and relevant detailed rules and the determination opinions of overseas competent authorities, explain whether the basis for determining that the issuer is a "relevant entity" but has not carried out "relevant activities" in the Cayman Islands is sufficient, whether the simplified economic substance test requirements or relatively complex economic substance test have been met at this stage, and if it fails to meet the requirements of one of the economic substance tests, whether it will have a material adverse impact on the issuer's production and operation, and whether it will constitute an obstacle to the issuer's listing in this offering, and fully warn of relevant risks;
(2) According to the relevant provisions of foreign exchange management laws and regulations and other relevant provisions and the determination opinions of the competent authority, explain whether the former director Chen Shuquan and the shareholders of Yuyun Holdings have gone through the foreign exchange registration procedures in accordance with the law, and have not been able to verify whether the matters may lead to the issuer being punished or bear criminal and other legal liabilities, and whether it may constitute a legal obstacle to the listing of this offering;
(3) According to Guo Shui Document No. 7 and the Announcement on Issues Related to the Withholding of Income Tax at Source of Non-Resident Enterprises, explain whether the indirect transfer of domestic taxable assets should be subject to Chinese enterprise income tax, the specific basis for determining "reasonable business purposes", and whether a clear opinion of the competent tax authority is not required to pay taxes. If the withholding agent is held liable, the impact on the issuer's financial data, and whether the issuer is involved in the risk of administrative penalties;
(4) whether there is a discrepancy between the amount of equity registered by the issuer and the amount of equity in the accounting statements, and whether the information has been fully disclosed.
Ask the sponsor and issuer's lawyers to express clear opinions.
Reply:
1. According to the specific provisions of the Cayman Islands Economic Substance Law and relevant detailed rules and the determination opinions of the competent overseas authorities, explain whether the basis for determining that the issuer is a "relevant entity" but has not carried out "relevant activities" in the Cayman Islands is sufficient, whether the simplified economic substance test requirements or relatively complex economic substance test have been met at this stage, and if it fails to meet the requirements of one of the economic substance tests, whether it will have a significant adverse impact on the issuer's production and operation, and whether it will constitute an obstacle to the issuer's issuance and listing, And fully inform the relevant risks
(1) Explain whether the basis for determining that the issuer is a "relevant entity" but has not carried out "relevant activities" in the Cayman Islands is sufficient in accordance with the specific provisions of the Cayman Islands Economic Substance Law and relevant detailed rules and the determination opinions of the competent overseas authorities
1. The provisions and basis for determining that the issuer belongs to a "relevant entity"
According to the special opinion issued by Cayman lawyers on March 1, 2023, "entity" under the International Tax Co-Operation (Economic Substance) Act (the "Cayman Islands Economic Substance Law") and its guidelines means: (1) a company incorporated under the Cayman Companies Law or a limited liability company registered under the Limited Liability Companies Law; (2) a limited liability partnership registered under the Limited Liability Partnership Act; or (3) a company incorporated outside the Cayman Islands and registered under the Cayman Companies Law. The issuer is a company incorporated on 3 January 2002 under the Cayman Companies Law and is an "entity" under the Cayman Islands Economic Substance Law.
According to the special opinion issued by the Cayman lawyers, the company is a "related entity" under the Cayman Islands Economic Substance Law unless it is a "domestic enterprise, foreign tax resident or investment fund" in the Cayman Islands. For the purposes of "domestic business" means a company that is not part of a multinational enterprise group and (1) conducts business only in the Cayman Islands and complies with the Local Companies (Control) Law or the Trade and Commerce Licensing Act, or (2) falls under Section 80 of the Cayman Companies Law. According to the special opinion issued by Cayman lawyers, the issuer is not a domestic enterprise, overseas tax resident or investment fund under the Cayman Islands Economic Substance Law, and is a "related entity".
2. The provisions and basis for determining that the issuer has not engaged in "relevant activities"
According to the special opinion issued by the Cayman lawyers, if the relevant entity carries out "relevant activities" in the Cayman Islands, it needs to meet the economic substance test under the Cayman Islands Economic Substance Law. "Relevant activities" under the Cayman ES Law means core income-generating activities undertaken by "related entities" in the Cayman Islands, including:
For item (1) above, the issuer is not a company engaged in holding business, and the issuer has also undertaken financing functions overseas, obtained deposit interest, and issued convertible bonds for financing; At the same time, according to the special opinion issued by Cayman Lawyers, the existing business of the issuer is not a pure holding business under paragraph (1) above. The issuer has also not engaged in the relevant business of items (2) to (9) above and therefore the issuer has not carried out "relevant activities" in the Cayman Islands.
According to the above provisions of the Cayman Islands Economic Substance Law and the special opinion issued by Cayman lawyers, there is sufficient basis for finding that the issuer is a "relevant entity", but has not carried out "relevant activities" in the Cayman Islands.
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3. According to Guo Shui Document No. 7 and the Announcement on Issues Related to the Withholding of Income Tax at Source of Non-Resident Enterprises, explain whether the indirect transfer of domestic taxable assets should be subject to Chinese enterprise income tax, the specific basis for determining "reasonable business purposes", and whether a clear opinion of the competent tax authority is not required to pay taxes. If the withholding agent is held liable, the impact on the issuer's financial data, and whether the issuer is involved in the risk of administrative penalties
(1) According to Guo Shui Document No. 7 and the Announcement on Issues Related to the Withholding of Non-resident Enterprise Income Tax at Source, explain whether the indirect transfer of domestic taxable assets should be subject to Chinese enterprise income tax, the specific basis for judging "reasonable business purposes", and whether a clear opinion of the competent tax authority is not required to pay tax
According to a special tax opinion issued by KPMG Advisory (China) Co., Ltd., there are sufficient reasons to find that Sharp Vision's transfer of 78.15% of the shares of Deli International in April 2018 (the "Transaction") has a "reasonable business purpose", and the provisions of Article 1 of Guo Shui Circular 7 are not applicable. The details are as follows:
1. Rules for judging "reasonable business purposes"
According to Article 1 of Guo Shui No. 7 Document, if a non-resident enterprise indirectly transfers the equity and other assets of a Chinese resident enterprise by implementing an arrangement that does not have a reasonable commercial purpose and avoids the enterprise income tax liability, it should recharacterize the indirect transfer transaction in accordance with Article 47 of the Enterprise Income Tax Law and confirm it as a direct transfer of the equity and other property of a Chinese resident enterprise.
According to Article 120 of the Regulations for the Implementation of the Enterprise Income Tax Law, the term "not having a reasonable business purpose" in Article 47 of the Enterprise Income Tax Law refers to the main purpose of reducing, exempting or deferring the payment of taxes.
According to Article 3 of Guo Shui No. 7 Document, to determine a reasonable business purpose, all arrangements related to the indirect transfer of China's taxable property should be considered as a whole, and the following relevant factors should be comprehensively analyzed in light of the actual situation:
(1) whether the main value of the equity of the overseas enterprise comes directly or indirectly from China's taxable assets;
(2) whether the assets of the overseas enterprise are mainly composed of investments directly or indirectly in China, or whether the income obtained by the overseas enterprise is mainly derived directly or indirectly from within China;
(3) whether the functions actually performed and the risks borne by the overseas enterprise and its subsidiaries that directly or indirectly hold China's taxable property can prove that the enterprise structure has economic substance;
(4) the duration of the shareholders, business model and relevant organizational structure of the overseas enterprise;
(5) Income tax payable overseas for indirect transfer of Chinese taxable property;
(6) the substitutability of indirect investment, indirect transfer of China's taxable property transactions and direct investment and direct transfer of China's taxable property by the equity transferor;
(7) the tax treaties or arrangements applicable in China for income derived from indirect transfer of Chinese taxable property;
(8) Other relevant factors.
2. This transaction has a judgment basis of "reasonable commercial purpose"
According to the special tax opinion issued by KPMG Advisory (China) Co., Ltd., there are sufficient reasons to find that the transaction has a "reasonable business purpose", so that the provisions of Article 1 of Guo Shui Circular No. 7 are not applicable and there is no need to pay PRC enterprise income tax. The specific judgment is based on the following:
3. Interviews with the competent tax authorities
According to the sponsor and the issuer's lawyers, interviews were conducted on 23 February 2022 with relevant staff of the Shenzhen Bao'an District Taxation Bureau of the State Administration of Taxation. Relevant staff introduced that in transactions involving indirect transfer of domestic taxable assets, if the transferor believes that the relevant transaction has a reasonable commercial purpose, the corresponding evidence materials can be kept for future reference; As of the date of the interview, there are no records of tax investigations and penalties related to CIMC, CIMC-Tianda Airport and their direct or indirect controlling shareholders.
In summary, the transaction has a reasonable commercial purpose, and there are sufficient reasons to find that this transaction has a "reasonable commercial purpose", so the provisions of Article 1 of Guo Shui No. 7 Circular do not apply.
Source: Longshang Tax Language