Key Issues Regarding the Administrative Measures on the General Anti-Avoidance Rule (for Trial Implementation)

On December 2, 2014, the State Administration of Taxation (“SAT”) issued the Administrative Measures on the General Anti-Avoidance Rule (for Trial Implementation) (the “Measures”), which will be effective on February 1, 2015.

Although principles on the application of general anti-avoidance rules (“GAAR”) were included in Corporate Income Tax Law of People’s Republic of China (“CIT Law”), Detailed Implementation Rules of CIT Law and the Implementation Measures on Special Tax Adjustments (for Trial Implementation), specific administrative measures regarding GAAR application such as the operation procedures and enforcement standards were absent for a long time until the release of the Measures.

In general, the Measures further regulate and clarify various issues regarding GAAR application such as the applicable scope, features of tax avoidance arrangements, adjustment methods, working procedures, dispute resolutions when applying GAAR, etc.

The main contents in detail are clarified as follows:

1. Applicable Scope (Article 2 and Article 3)

The Measures shall be applicable when Chinese tax authorities implement special tax adjustments towards the corporate tax avoidance arrangements conducted by companies in order to obtaining Tax Benefits (defined below) without reasonable commercial purposes.

Tax Benefits refer to the reduction, exemption or delay of corporate income tax payments.

According to Article 120 of CIT Law Detailed Implementation Rules, “without reasonable commercial purposes” refer to the key purposes of obtaining the aforementioned Tax Benefits.

On the other hand, the Measures shall not apply to the following circumstances:

a. Arrangement irrelevant to cross-border transactions or payments.
b. Illegal tax behaviors such as avoidance of paying taxes, avoidance of paying unpaid taxes, tax fraud, refusal of paying tax, and issuance of forged invoices.

2. Exception of Application of the Measures (Article 6)

The corporate tax avoidance arrangements which are within the range of other special tax adjustments including transfer pricing, cost sharing, controlled foreign corporations, thin capitalization shall first apply to relevant laws regulating special tax adjustments, such as Section 6 of CIT Law.

On the other hand, the corporate tax arrangements which are within the range of execution of taxation agreements such as beneficial owner and interest restriction shall first apply to relevant rules of execution of taxation agreements.

Note: The Measures should only be applicable if a tax arrangement cannot be regulated by any of aforementioned special tax adjustments. In other words, the Measures shall be the last resort to counter tax avoidance when all other anti-avoidance tools are exhausted.

3. Features of Tax Avoidance Arrangements (Article 4)

In order to facilitate the assessment of Chinese tax authorities and the self-assessment of involved companies, the Measures specify the following major features of “tax avoidance arrangements”:

a. The sole purpose or primary purpose is to obtain Tax Benefits;
b. Obtaining Tax Benefits by certain means, the form of which is compliant with the tax laws but inconsistent with the economic substance.

4. Tax Adjustment Methods (Article 5)

Chinese tax authorities shall implement special tax adjustments on the basis of “ similar arrangements with reasonable commercial purposes and economic substance” and in accordance with the principle that “the substance is superior to the form”. Special adjustment methods shall include:

a. Re-characterizing the entire or part of transactions of the tax arrangements;
b. In terms of tax, denying the existence of a transaction party for tax purposes, or deeming the transaction party and other transaction parties as the same entity;
c. Re-characterizing the related income, deductions, tax incentives and overseas tax discount or exemption, or reallocating them among transaction parties;
d. Any other reasonable methods.

5. Information Provided for Investigation of Tax Avoidance Arrangements (Article 11)

Companies being investigated for the tax avoidance arrangements shall provide the following documents within 60 days after receiving inspection notice from Chinese tax authority if they consider that their arrangements shall not be regarded as tax avoidance arrangements:

a. Background documents for the arrangements;
b. Documents for the commercial purposes of the arrangements;
c. Information on the internal decision-making and management of the arrangements, such as board resolutions, memorandums and emails;
d. Detailed transaction information relating to the arrangements, such as contracts, supplemental agreements, and payment receipts or payment collection;
e. Communication information with other transaction parties;
f. Other documents which may prove that their arrangements shall not be regarded as tax avoidance arrangements;
g. Other documents considered necessary by Chinese tax authorities.

Companies that cannot submit such documents on time due to special circumstances may apply to the Chinese tax authorities for an extension of submission timeline in written form. However, even if the application is approved, the extended period for submission shall not exceed 30 days.

Note: The purpose of timeline requirements mentioned above is, on one hand, to ensure Chinese tax authorities to handle GAAR related cases efficiently and, on the other hand, to improve tax related risk control measures and internal tax related rules compliance of relevant companies.

6. Working Procedures (Article 8, Article 15 and Article 16)

Besides the substantial regulations mentioned above, the Measures also specify relevant working procedures which cover all phases of GAAR administration, including admission, investigation and the closure of a case, as well as procedural rules which set out roles and responsibilities of Chinese tax authorities in different levels in each phase to ensure transparent and fair implementation of GAAR.

Where the in-charge local tax authority become suspicious of tax avoidance arrangements of one company, it shall report the case upwards through different levels to the provincial tax authority for approval, and then apply to the SAT in order to initiate the investigation process.
During the investigation process, in-charge tax authorities may verify the information provided by relevant companies through on-site investigation, issuing letters to request assistance of companies for the investigation, or utilizing public information, etc.

In-charge local tax authorities shall examine relevant documents obtained during the investigation process within 9 months after the approval of case filing, comprehensively judge whether relevant companies conduct tax avoidance arrangements, form opinions and reasons for “plans not to adjust” or “preliminary adjustment plans”, and apply to the SAT for case closure after reporting such opinions and reasons level by level to the provincial tax authorities for approval.

7. Dispute Resolutions (Article 19 and Article 21)

On one hand, while the companies being investigated disagree with the GAAR assessments made by the in-charge tax authorities, they can apply for legal remedies in accordance with relevant laws and regulations.

On the other hand, if investigated companies consider that the general anti-tax avoidance adjustments made by tax authorities result in the international double taxation or the taxation is incompliant with provisions of tax treaties, investigated companies may initiate the mutual negotiation procedures according to tax treaties and relevant provisions thereof.


Generally, the Measures provide Chinese tax authorities a detailed guideline for the implementation of GAAR, build up a more transparent and consistent GAAR framework and create more specific practical methods in order to make the tax adjustments and crack down the international tax avoidance arrangements and evasion.

On the other hand, companies, especially multinational corporations, shall pay sufficient attention to the substantial rules and practical procedures in the Measures in order to conduct the proper tax arrangement for the international transactions.

However, as to tax adjustment methods in the Measures, the limitation of “economic substance” still remains ambiguous, which may confuse companies to some extent when they conduct tax arrangements. Therefore, more detailed rules for implementation are expected to facilitate the execution of the Measures in future.