CHINA Law and Practice Contributed by: Borong Liu, Xiaoli Liu, Jingyi Lu and Zhijie Zhang, Zhong Lun Law Firm
7.2 Taxes on Profit In securitisations, the transfer of underlying assets to the SPVs does not generally give rise to a tax burden for the SPVs. On the other hand, income derived from the underlying assets by the SPVs might be subject to enterprise income In regard to credit asset securitisations, accord - ing to Ministry of Finance [2006] No 5, if the trustee has allocated the income of the trust to institutional investors during the fiscal year, then the institutional investors shall pay the enter - prise income tax on this income and, in order to avoid double taxation, no income tax needs to be paid by the trust. However, the unallocated trust income during the fiscal year shall be sub - ject to enterprise income tax at the trust level. If the income allocated to the investors has already been taxed, then the investors do not need to pay the income tax thereon, to avoid double taxation. tax and VAT. Income Tax According to the Enterprise Income Tax Law, “enterprises” and “other income-earning organi - sations” shall pay the enterprise income tax. For asset securitisation business, whether the SPV is an SPT or an ABSP, neither constitutes an “organisation” under the law, and therefore nei - ther is subject to enterprise income tax. Value-Added Tax If the underlying assets are interest-bearing assets such as loans or financial leases, then the SPV will acquire rights to such interest or income after the underlying assets are transferred to it. According to the Ministry of Finance [2016] No 140 and the Ministry of Finance [2017] No 56, etc, the manager of the asset management prod - ucts shall pay VAT at a rate of 3% on its taxable activities occurred in the operation of the asset
management products. This rule also applies to securitisation. Nevertheless, in the case of an on-balance sheet securitisation, the tax author - ity may require the originator to continue to pay a 6% VAT on the proceeds from the transferred underlying assets, which may result in the prob - lem of double taxation. After unremitted com - munications with tax authorities, some local tax authorities have agreed to a tax on the SPV for interests of the securities issued to the investors instead of interests arising from the underlying asset pool, to alleviate the tax burden. There are also a very small number of local tax authorities that allow trustees not to pay taxes on any inter - est. But the State Taxation Administration has not yet provided any clear instruction on it, this issue has not been completely resolved. Stamp Duty The Ministry of Finance [2006] No 5 provides certain exemptions from stamp duties for credit asset securitisations. An originator or trustee is temporarily exempted from stamp duty arising from taxable agreements between the originator, the trustee and the fund custodian, the securi - ties depository or other service providers in a securitisation transaction. The trustee’s sale and the investors’ purchase and sale of credit asset securities, as well as accounting books estab - lished for the trust, are temporarily exempted from stamp duty. So far, there are no special tax exemptions for exchange market securitisations. 7.3 Withholding Taxes If a domestic originator transfers its receiva - bles against a domestic debtor to an offshore SPE, even though the SPE has not established any entity or place of business within China, it would still be liable for corporate income tax on income sourced within China (such as interest or rent), pursuant to the provisions of the Enterprise Income Tax Law. Under the Enterprise Income
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