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2026-10-02 12:50:38 Nomura held a conference call with a tax expert with more than 20 years of experience in cross-border taxation, related-party transactions and offshore listings. The expert believed that China's tax enforcement environment has tightened considerably over the past year and is unlikely to ease in the short term, while large overseas-listed Chinese companies, including internet firms, remain a key regulatory focus. For overseas-listed internet companies, the expert highlighted two major potential tax risks. First, tax authorities are stepping up scrutiny on whether Hong Kong holding entities possess sufficient business substance to qualify for the preferential 5% withholding tax rate on dividends from Mainland subsidiaries, compared with the standard 10% tax rate. If the preferential treatment is denied, companies may face back taxes and late payment surcharges. Second, although authorities have not targeted the VIE (Variable Interest Entity) structure itself, greater attention is being paid to the tax treatment of transactions between VIE operating entities and WFOEs (Wholly Foreign-Owned Enterprises), including whether related-party transactions such as service fees and technology or system charges reflect genuine business activities, whether pricing is reasonable, and whether such arrangements are consistent with the functions and assets of each entity. Nomura said related-party transactions between VIEs and WFOEs are fairly common in China's internet sector. The expert believed companies transferring an especially high proportion of VIE profits to WFOEs may face greater scrutiny. However, many companies do not disclose transfer ratios, making it difficult to assess the tax risks of individual firms. The expert does not believe authorities intend to challenge the VIE structure itself, and any tax adjustments are more likely to arise through broader reviews of transfer pricing, preferential tax treatment or tax deductions. Amid tightening tax regulation, some internet companies may become more cautious regarding shareholder capital returns, especially when such returns rely on cash transfers from Mainland operating entities to offshore holding companies. ~ AASTOCKS Financial News Website: www.aastocks.com | |