China has issued Circular Guoshuihan  No. 601 to plug a loophole in the tax treaty relief for conduit companies, says KPMG China.
Affecting the corporate income tax of foreign companies in all sectors and the individual income tax of individuals, the circular points out that only the "beneficial owner" can enjoy treaty relief in respect of dividents, interest, royalties and capital gains under the Double Tax Agreement.
KPMG says that the beneficial owner should generally carry on substantial business activities and that an agent or conduit company will not be regarded as a "beneficial owner."
KPMG further explains that the tax authority shall determine the status of "beneficial owner" on a case by case basis, using the principle of substance over form.
KPGM explains that the non-resident is obliged to pay or distribute all or most of its income to a resident of a third jurisdiction within a prescribed period of time. In addition to the loan or royalty agreement in respect of which the interest or royalties are paid, there is another agreement concluded between the non-resident and a third party whereby the interest or royalties are passed on.