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Is tax haven still a haven?

28 July 2011 

It has long been a popular choice for some foreign investors and domestic privately owned companies to make investment or round-trip investment in China via a vehicle set up in a tax haven, such as, British Virgin Islands ("BVI"), Bahamas, Bermuda, etc. Some of the major reasons behind such choice are to keep the identity of the investors and beneficiaries confidential and avoid taxes. However such investment mode has been losing its edge gradually.
According to announcement of PRC State Administration of Taxation last month, the tax information exchange agreement ("TIEA") signed between government of China and government of BVI has come into force, and China and BVI may, exchange tax information on the income earned on or after 1 January 2011 pursuant to the stipulated procedures. In relation to provision of tax information, the TIEA also requires the requested party to provide other related information, such as information regarding the legal and beneficial ownership of companies, partnerships, trusts, foundations, information on settlors, trustees, beneficiaries and protectors of trusts; and information on founders, members, beneficiaries and directors or other senior officers of foundations. 
In addition to the TIEA between China and BVI, according to announcement of PRC State Administration of Taxation in February of this year, the TIEA between China and Bahamas has also come into force, and both sides have been able to exchange tax information as from 1 January 2011.
Besides, from the news published on the official website of PRC State Administration of Taxation, China has already signed TIEAs with other tax havens including Isle of Man, Guernsey, Jersey and Bermuda.
Along with entry into, coming into force and performance of TIEAs between China and tax havens, we may foresee that it will become unattractive to invest in China through a vehicle established in a tax haven. On the other hand, investors who have already invested in China through tax havens may need to reconsider their investment and tax planning.

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Disclaimer
Any legal information contained in this newsletter is general in nature and laws and regulations are changing from time to time and compliance will always depend upon the particular circumstances. We have not attempted to give exhaustive descriptions of law or to give a legal opinion on specific legal issues. You should not rely on this newsletter as a legal advice for any particular purpose.

 

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