The British Virgin Islands (BVI) are the second largest source of foreign direct investment into China. Many foreign companies use this tax haven to establish their holding structure, while many Chinese companies and individuals use BVI entities to park their (trading) income. The effectiveness, on 31 December 2010, of a treaty on the exchange of tax-related information between the jurisdictions could have a major impact on how attractive the BVI is as a conduit for businesses and individuals engaging with China. It also puts pressure on foreign and Chinese businesses that are currently established in the BVI, to review and optimize their structures.
The treaty’s provisions with the biggest impact are undoubtedly those that relate to the Chinese government’s right to demand from the BVI government certain specific information from financial institutions or other persons acting in an agency or fiduciary capacity, including nominees and trustees. Such information can relate, for example, to the legal and beneficiary ownership of companies and other kinds of corporate entities, including ownership information on such entities.
For foreign companies that have structured their Chinese investment through the BVI, this exposes them to risk, as it becomes much easier for Chinese tax authorities to determine the exact nature of the holding corporate structure. Questions that will likely interest the Chinese tax authorities include:
- Whether the BVI holding company should be viewed as a Chinese tax resident (i.e. a PE in China), and therefore subject to PRC corporate income tax.
- Whether the sale of a BVI holding company should be subject to capital gains taxes in China, because it is not regarded as the beneficial owner of the Chinese subsidiary);
- Individuals who act as shareholders, beneficial owners or nominees of a BVI-registered entity may also be exposed to greater risk as regards individual income taxes that may be due in China over income derived from such positions.
This treaty is another example of how international businesses with operations in China must take their tax position serious. R&P China Lawyers can advise you on the risks to your tax position in China. Moreover, R&P China Lawyers has worked with a number of companies that structure investments in the BVi and other offshore jurisdictions to address such tax concerns. If you are in need of a referral, please contact us at [email protected].