Supreme Court issues two Judicial Interpretations on Property Law

1) Interpretation on Issues concerning the Specific Application of Law in Handling Building Differentiation Ownership Cases (May 24, 2009)

2) Interpretation on Issues concerning the Specific Application of Law in Handling Property Management Service Cases (May 24, 2009)

These are the first two interpretations the Supreme Court issued regarding Property law. The Interpretations attach great importance to the rights of the owner and intend to balance the interests between property management company and owners. The property management service relationship without written contract will not be recognized.

The Interpretations stipulate the recognition of owner, the definition of exclusive areas and co-owned areas, parking area and garage, the use of co-owned areas for commercial purpose, the condition for conversion from residential purpose to commercial purpose, nullification of causes exempting property management company from liability and fees, withdrawal of property management company.

by UBILLA & CIA

Supreme Court issues new interpretation on Contract Law

On May 12, Supreme Court promulgates the Application of the Contract Law (hereafter referred to as “Interpretation”). The Interpretation clarifies issues frequently dealt with the Contract Law in the judicial practice.

The Interpretation stipulates the application principle of circumstances change, several issues regarding to the formation and validity of contract which including place of contracting, clauses required to form a contract and mandatory provisions which infringement may invalidate contract. The Interpretation also adjust the liquidated damage for default, the set-off rules and revocation rights of the obligees.

by UBILLA & CIA

China Adopts Controversial Extraterritorial & Retroactive Tax and Disclosure Rule Relating to Share Transfers by Non-Resident Enterprises

The PRC State Administration of Taxation issued the Notice on “Strengthening the Management of Enterprise Income Tax Collection of Income from Share Transfers by Non-resident Enterprises”, on December 10, 2009 (the "Notice").

The Concept of “Income” for the Purpose of the Notice.

“Income” in the Notice is defined as income derived from direct or indirect transfers of shares of Chinese resident enterprises, by non-resident enterprises.

However, income derived from buying and selling shares of listed Chinese resident enterprises in the public stock exchange markets is not included within the scope of the Notice.

Calculation of Share Transfer Income

The taxable share transfer income is defined as share transfer price minus the cost of share investment. Share transfer price refers to the consideration received by the transferor in the form of cash, non-cash assets, share, etc. Cost of share investment refers to the contribution to a Chinese resident enterprise for investment by the transferor, or the consideration paid by the transferor in order to purchase the share of the Chinese resident enterprise.

Indirect Share Transfer

The Notice indicates that ultimate foreign investors are required to disclose the required documents regarding indirect transfers of Chinese resident enterprises to the PRC tax authorities under the following circumstances:

1. If an intermediate holding company transfers its own share to a third party; and
2. This intermediate holding company is located in a low tax jurisdiction or such jurisdiction exempts income tax on foreign-sourced income.

The documents to be disclosed are as follows:

1. Share transfer contract or agreement;
2. The relationship between the foreign investor and the intermediate holding company in terms of cash flow, operations, purchase & sales, etc.;
3. The business operation, personnel, financial accounts, and assets of the intermediate holding company;
4. The relationship between the intermediate holding company and the Chinese resident enterprise in terms of cash flow, operations, purchases & sales;
5. Explanation of the reasonable business purpose for the foreign investor to set up the intermediate holding company;
6. Other documents required by the tax authority.

Though the term "indirect transfer" is not defined in the Notice , it is presumed that indirect transfer refers to a case where an intermediate holding company which is set up by a foreign investor transfers its own shares -rather than the shares of the residence enterprise- to a third party. Sometimes, the foreign investor may use many levels of intermediary holding companies in different countries to accomplish the share transfer. No matter how complicated the cases are, the disclosure shall be required for review as long as the foreign investor has a little relationship with the shares being transferred.

Retroactive Effect

The notice comes into effect 1 January 2008 retroactively, which means the rules in the Notice can apply to share transfers of years in 2008 and 2009.

Comments and Conclusions

The Notice could be applicable to all “global M&A” transactions taking place out of China as long as the transferor of the shares indirectly holds some equity assets in China.

Foreign investors which have conducted, or will conduct in the future, such share transfers will require a more thorough review of the business structure and tax planning put in place -or to be put in place-.

Depending on the share structure of the off-shore intermediary companies, and how the transfer is structured, some of these burdensome procedures could be avoided. This corporate and tax planning is obviously necessary in order to avoid some unwanted consequences.

by UBILLA & CIA