Recently, the State Taxation Administration issued the "Announcement on Optimizing Tax Services and Simplifying Reporting of Overseas Investments and Income-Related Information Reports for Resident Enterprises" (hereinafter referred to as the "Announcement"). The interpretation is as follows:

Policy Background

In 2014, the State Taxation Administration issued Announcement No. 38, "Announcement on Issues Concerning Residents' Enterprises Reporting on Overseas Investments and Income-Related Information" (hereinafter referred to as "Announcement 38"). It stipulated matters related to residents' enterprises reporting on overseas investments and income. Since the issuance of Announcement 38, the provision of relevant information by enterprises concerning overseas income has gradually been standardized, and the systematic and comprehensive collection of information on overseas investments and income has been effectively enhanced. The foundation of overseas tax services and management has continuously strengthened.

In order to implement the "Opinions on Further Deepening Taxation Administration Reform" issued by the Central Committee and the State Council, continue to deepen the "streamlining, decentralization, and optimization" reform of the tax system, improve the tax business environment, carry out the "convenient tax filing spring action," and based on the feedback and suggestions received from all parties since the implementation of Announcement 38, the State Taxation Administration has further simplified the content and methods of related information reporting, improved the quality of information reporting and tax compliance, and optimized tax service measures. This announcement has been issued accordingly.

Policy Contents

1. If a resident enterprise or its domestic partnership holds, directly or indirectly, foreign enterprise shares or voting shares exceeding 10% (inclusive) on any day of a tax year, it shall submit a consolidated "Report on Overseas Investment Information by Resident Enterprises" when handling the annual enterprise income tax declaration with the competent tax authority.
2. The term "controlled foreign enterprise" referred to in the attached table of this announcement means an enterprise established in accordance with foreign (regional) laws and regulations and not having its actual management institution within the territory of China, controlled by a resident enterprise or controlled by both a resident enterprise and Chinese residents. In determining control, the calculation of the shareholding ratio of multi-layer indirect holdings is multiplied by the shareholding ratio of each layer, and if the intermediate layer holds shares exceeding 50%, it is calculated as 100%.
3. If a non-resident enterprise establishes an institution or place within the territory and obtains income arising outside the territory but with actual connections to its institution or place within the territory, it shall refer to this announcement.
4. This announcement shall take effect from October 10, 2023. Information that should be reported occurring in the year 2023 and subsequent years shall be governed by the provisions of this announcement. Chapter Eight, Articles Seventy-Six, Seventy-Seven, and Seventy-Nine of the "Notice of the State Administration of Taxation on the Issuance of the Implementing Measures for Special Tax Adjustments (Trial)" (Guoshuifa [2009] No. 2) and the "Announcement of the State Administration of Taxation on Issues Related to Residents' Enterprises Reporting on Overseas Investments and Income" (State Administration of Taxation Announcement No. 38 of 2014) shall be simultaneously repealed.

Specific Implementation Regulations

1. What items have been optimized in the announcement?

First, it reduces the number of forms. The "Announcement" consolidates the "Report on Residents' Participation in Foreign Enterprises" and the "Report on Controlled Foreign Enterprises" from Announcement No. 38, redesigning them into the "Report on Overseas Investment Information by Resident Enterprises" (referred to as the "Report").

Second, it reduces the reporting frequency. Reporting, which used to occur during corporate income tax prepayment, has been changed to annual reporting, significantly reducing the number of times companies need to report.

Third, it optimizes data entry. Data items have been streamlined and consolidated from 57 to 28, reducing the reporting burden on taxpayers.

2. Which types of resident enterprises need to fill out the "report"?

First, resident enterprises that directly or indirectly hold foreign enterprise shares or voting shares exceeding 10% on any day of a tax year have an obligation to fill out the "Report" if they engage in direct overseas investments. For example, if Resident Enterprise C directly holds shares of Foreign Enterprise D, meeting the conditions specified in this announcement, it should fill out the "Report." Resident Enterprises A and B do not directly hold foreign enterprise shares and are not required to fill out the "Report."

Second, resident enterprises that meet the reporting conditions through domestic partnerships should have the partners of the domestic partnership fill out the "Report." For example, if Resident Enterprises A and B hold shares of Foreign Enterprise D through domestic partnership C, they should fill out the "Report." Resident Enterprise A, which indirectly holds shares of Foreign Enterprise D through the partnership, should fill out the "Report," while domestic partnership C does not need to fill it out.

3. Which overseas invested enterprises do resident enterprises need to report?

First, resident enterprises need to report foreign enterprises in which they directly or indirectly hold shares or voting shares exceeding 10% on any day of a tax year. The calculation of the shareholding ratio is done as specified in this announcement, including the multiplication of shareholding ratios for multi-layer indirect holdings. If an intermediate layer holds shares exceeding 50%, it is calculated as 100%. For example, if Foreign Enterprise B holds shares of Foreign Enterprise C exceeding 50%, it is calculated as 100%. Therefore, Resident Enterprise A indirectly holds shares of Foreign Enterprise D with a shareholding ratio of 10%, calculated as 100% x 100% x 10% = 10%.

Second, if there is a change in share ownership during the tax year such that the year-end shareholding is less than 10%, the overseas invested enterprise still needs to be reported. When filling out the "Production and Operations Information of Foreign Enterprises" in the report, the most recent data before the transfer can be provided.

4. In what situations do resident enterprises need to report "controlled foreign enterprise information"?

Controlled foreign enterprises should be determined based on control standards, including share control and substantive control, as well as the foreign enterprise's location, which is established in accordance with foreign (regional) laws and regulations and has its actual management institution outside the territory of China. Resident enterprises should make their own judgments on whether the overseas invested enterprise is a controlled foreign enterprise and check the confirmation box.

To determine whether the reporter meets the conditions specified in Article 117, Paragraph 1 of the Enterprise Income Tax Implementation Regulations, the reporter should provide information about other Chinese shareholders who directly or indirectly hold more than 10% of the equity in the overseas invested enterprise. When filling out the "Controlled Foreign Enterprise Information," the source of the information should be explained.

Controlled foreign enterprises established in countries (regions) with an actual tax rate lower than 12.5%, which do not distribute profits or reduce distributions for reasonable business needs, or which meet exemption criteria, may be handled by the tax authorities in accordance with the relevant provisions of the Enterprise Income Tax Law and its Implementation Regulations and the "Implementing Measures for Special Tax Adjustments (Trial)" Chapter Eight regarding controlled foreign enterprise management.

5. How should foreign enterprise production and operations information be reported?

For information related to the production and operations of foreign enterprises provided in the "Report," apart from the "actual income tax paid" item, accounting statement data of the invested enterprise should be used for filling in, and the annual and foreign currency conversion should be determined according to the filling instructions. For example, if the tax year of the foreign enterprise B jurisdiction is different from that in China, the data for the relevant year should be filled in as per the instructions.