A Brief Tax Analysis of Hunter BHR Equity Arrangement

Source: AP

Background

Skancateles LLC(SKA) subscribed to 3 million RMB in return for 10% of equity interest in Bohai Harvest RST (Shanghai) Equity Investment Fund Management Co., Ltd (BHR), a company established in the People’s Republic of China (PRC) with a registered capital of 30 million RMB on December 16, 20131.

Tax citizen status

BHR is a firm incorporated in PRC which adopted limited liability corporation form and is a PRC tax resident – both domestic and overseas income of which should be reported to Chinese Communist Party (CCP) tax authority and taxed in PRC2. SKA, an American company, is a non-resident taxpayer of China. Only income from PRC is subject to PRC regulation. SKA is a resident taxpayer of the US. Its global income is subject to IRS regulation. SKA should report its overseas assets to IRS pursuant to Foreign Account Tax Compliance Act (FATCA) requirement3.

Possible ways of tax avoidance and economic interest realization

Under PRC Company Law4, companies are not required to distribute dividend based on the shares. Therefore, we shouldn’t assume that only 10% of profit realized by BHR would be distributed to SKA. However, dividend distribution is a taxable income which require IRS reporting. This is not the best way to hide the income and may raise attention from US authorities or media.

For people who are familiar with business relationship in PRC, it’s well-known that rather than dividend distribution, expense reimbursement, related party transactions are commonly used for economic interest realization. For the loans mentioned above, reimbursing expenses of related parties, paying compensation to Crystal Liu or transferring funds to tax heavens are much more preferred. Under both the Tax Collection Administration Law5 and Enterprises Income Tax Law of PRC, for business transactions between an enterprise and a related party which do not comply with the arm’s length principle thus resulting in reduced taxable revenue or taxable income for the enterprise or its related enterprise, the tax bureau has the right to make adjustments based on reasonable methods. Hence, we proposed two possible ways that BHR may deploy for tax avoidance:

1. Hide related party relationship;

2.Due to lack of Rule of Law in PRC, despite obvious related party relationship, tax authorities may choose to neglect their duty and do not conduct investigation or adjustments. Tax inspection under CCP require sign-off from the chief of the county level or above tax authorities.

PRC had commenced governmental negotiation of FATCA since 2012 and concluded on the substantial content with USA in June 2014. Financial institutions in PRC should report information of American tax residents to IRS. Otherwise, the U.S. would be able to impose a 30% withholding tax. However, transactions that transfer economic interest to tax heavens by BHR with American accounts aren’t subject to IRS filing.

References:

  1. Loan agreement
  2. Enterprises Income Tax Law.
  3. IRS requirement
  4. Company Law of PRC
  5. Tax Collection Administration Law

Author: CPA Jim

Published by:G Translator / Financial and Law team

(Opinions are authors’. Thank you for reading.)

1+
0 Comments
Inline Feedbacks
View all comments

秘密翻译组G-Translators

秘密翻译组需要各类人才, 期待战友们的参与: https://forms.gle/wfiLGYNLSbZanFa59。🌹 欢迎大家订阅:1. 油管频道: https://www.youtube.com/channel/UC6K3m7kzxk5GXCkaUEP96kQ; 2. GTV频道: https://gtv.org/web/#/UserInfo/5ed199be2ba3ce32911df7ac Oct. 25