The Withholding Tax Issues Within the Indirect Transactions

Tianjin Boya Hotel Management Co., Ltd:

The withholding tax issues within the indirect transactions

Bihong Zhen

Business Communication

BU 120.601.81

Professor Kevin Lanagan

October 5, 2015

 The withholding tax issues within the indirect transactions

Executive Summary

In this era of globalization, global transactions are more and more common nowadays. China, as a newly industrializing economy, attracts quantities of oversea investments. However, due to the specific Chinese policy system, the withholding tax issues within the transaction are bothering more and more foreign invested companies located in China. How to deal with the withholding tax issues becomes a key point during the transaction.

This paper is focused on a specific indirect transaction case of a company located in China. However, the withholding tax issues and related solution in this paper can apply to any other corporates when they process an indirect transaction involved Chinese resident companies. All information and case analysis are based on the internal materials of this transaction.

 Tianjin Boya Hotel Management Co., Ltd (“the target company”), a wholly foreign owned enterprise located in China, is now currently involved into an indirect transaction and need to deal with its withholding tax issues within this indirect transaction. This paper is intended to analyze and clarify key points of the withholding tax issues within the related indirect transaction, and work out a solution on tax payment for Tianjin Boya Hotel Management Co., Ltd.

This paper is based on current law and regulations in effect in the China and does not cover any tax implications in jurisdictions other than the China. The research method of this paper contains literature review of current laws and related papers and telephone communication with in-charge tax authorities in China. I believe the target company can well manage their withholding tax issues following the solution in this paper.

Background

Indirect transactions are business transactions containing work or investments that are related to the purchase among the shareholders of one certain company (“the WOFE” or “the target company”) instead of the purchased company itself. The target company here is Tianjin Boya Hotel Management Co., Ltd.

Tianjin Boya Hotel Management Co., Ltd. (“the target company”) is a Wholly Foreign Owned Company, which is registered and located in Tianjin. Pacific Alliance Investment Management Limited (“PAIM”) is a fund management company incorporated in Cayman. The capital of PAIM values only 1 dollar. PAIM holds 100% of the target company. Pacific Alliance Asia Opportunity Fund L.P. (“PAX”) is the parent company of PAIM, which is established in the United States. PAX holds 100% of PAIM and offers long term loans to PAIM, in order to support the business activities of its invest company in China (i.e. the target company). In 2015, PAX sold the shareholdings of PAIM to Pacific Alliance Investment Management (HK) Limited (“PAIM HK”), a company registered and located in Hong Kong. Since PAIM holds 100% of the target company, the target company has been indirectly sold to PAIM HK by PAX.