1. John R. Keough, Partner The People’s Republic of China’s Enterprise Income Tax Regulation on Non-Resident Taxpayers Engaged in International Transportation Business

2. 1 Foreign vessel owners engaged with Chinese charterers were subject to The People’s Republic of China’s (“PRC”) Enterprise Income Tax law. Non-residents are expected to declare and pay tax for income received from International Transportation Business in China. Background

3. 2 Article 2 of the PRC’s Enterprise Income Tax Law defines a “Non-Resident” as: An enterprise incorporated pursuant to the laws of a foreign country/region with its actual administrative establishment located outside the territory of China, which: Has an establishment or premises within the territory of China, or Earns income within the territory of China. Non-Residents

4. 3 On June 30, 2014, the State Administration of Taxation of the People’s Republic of China (“SAT”) issued: “Notice on Provisional Measures on the Collection of Tax on Non-Resident Taxpayers Engaged in International Transportation Business” State Administration of Taxation Notice No. 37

5. 4 Article 2 of Notice No. 37 defines International Transportation Business: “[T]he business activities engaged by a non-resident enterprise in the provision of the carriage of passengers or goods or posts into or out of Chinese ports and the ancillary business of stevedoring or storage related thereto.” Non-residents seeking to provide such International Transportation Business services are required to register with the local tax authority within 30 days after signing any transportation agreement. Notice No. 37: International Transportation Business

6. 5 Active Income: Income earned from the commitment of a physical and/or intellectual labor by the non-resident taxpayer. For example: Income earned from freight or hire. Passive Income: Income earned without the commitment of physical or intellectual labor. For example: rent or royalties. Gross Income: Money paid to the non-resident taxpayer from its contractual counterparty before any costs or expenses are deducted. Taxable Income: Gross income less costs or expenses. Profit Margin: The percentage of taxable income to gross income. Notice No. 37: Income Definitions

7. 6 Three ways to Enforce Notice No. 37 1.Voluntary Declaration and Payment 2.Collection after Ascertainment 3.Withholding and Payment Notice No. 37: Enforcement

8. 7 Voluntary Declaration and Payment Registration with the tax authorities; Declaration of its taxable income in China with supporting evidence; Application of the tax rate (either 20 or 25%); and Tax Collection. Notice No. 37: Enforcement

9. 8 Collection After Ascertainment Registered non-resident tax payer fails to declare its taxable income. Record Keeping: –The authorities will rely on the tax payer’s records to determine taxable income. –If the non-resident fails to maintain or provide such records, the Chinese tax authority exercises its discretion to impose a profit margin on the gross income. In the context of voyage or time charterers the formula is: (freight or hire) x profit margin x income tax rate Notice No. 37: Enforcement

10. 9 Withholding and Payment Chinese parties or “domestic payers” are required to withhold tax from a payment when a non-resident company fails to register with the tax authority. A domestic payer qualifies to withhold tax from payment to non- resident where the domestic payer: –Makes payment to the non-resident tax payer; –Makes payment via its overseas affiliated party or a third party which has a special interest connection therewith; or –Otherwise conforms to the requirements of the Enterprise Income Tax Law. Notice No. 37: Enforcement

11. 10 The Chinese Tax Authority has the power to : Collect the unpaid tax amount (with a late fee fine) within five (5) years from the date on which the tax is due. Seize and enforce against non-taxpayer’s assets to enforce the tax law. Notice No. 37: Failure to Pay Tax

12. 11 Potential Alternatives to Payment 1.Double Tax Avoidance Treaties 2.Contractual Clauses Notice No. 37: Alternatives

13. 12 Double Tax Avoidance Treaties Procedure: –Application for registration: either before it is obliged to pay tax to the Chinese tax authority, or when it is declaring its duty to pay tax to the Chinese tax authority. –Production of documents required for International Transportation Business. Companies that fail to adhere to the tax treaty will be required to submit a revised application and, if not submitted within the prescribed time frame, will be required to pay back any tax due. Companies which have inadvertently missed out on any tax treaty benefits can apply for a tax refund within three years of the over- payment. Notice No. 37: Potential Alternatives to Payment

14. 13 Protective Clauses in Contracts Liability for all taxes (including future taxes) Indemnification for any tax monies for which non-resident is liable Precludes counterparty from deducting taxes that are/will be payable Choice of law provisions Notice No. 37: Potential Alternatives to Payment

15. 14 Notice No. 37: encourages the relevant tax authorities to increase their surveillance of non-resident enterprises operating in Chinese ports and allows for escalation of such inquiries to the SAT. Notice No. 37 does not require income be payable to Chinese companies to trigger the tax liability. Although anecdotal evidence supports that active enforcement of Notice No. 37 is occurring, the provision is still relatively new leaving much to be tested and determined. Notice No. 37: Issues & Unknowns

16. 15 Conclusions: Charting a Safe Course Uncertainty remains of the extent and manner of enforcement. –Signals that Chinese tax authorities plan to enforce the regulations on non-PRC resident ship owners, charterers and operators engaging in International Transportation Business. Significant impact likely on owners with vessels chartered to Chinese counterparties. –Passenger ships –Cargo ships.

17. 16 John R. Keough, Partner Clyde & Co US LLP The Chrysler Building 405 Lexington Avenue, 16 th Floor New York, NY 10174 212 – 710 – 3983 John.Keough@clydeco.us The author gratefully acknowledges the valuable assistance of the following persons in the preparation of this paper: Ik Wei Chong, partner, Clyde & Co Hong Kong, Shanghai; Samuel Yang, associate, Clyde & Co Hong Kong, Shanghai; Kirsty Gow, Clyde & Co LLP, London; Stuart Jackson, Clyde & Co LLP, London; and Zoë Sajor, Clyde & Co US LLP, New York. Thank You.

18. 17 1,5001st30040 Lawyers and fee earners worldwide Law Firm of the Year Legal Business Awards 2011 Partners worldwideOffices across Europe, Americas, Middle East, Africa and Asia. Clyde & Co US LLP accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary. No part of this summary may be used, reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise without the prior permission of Clyde & Co US LLP. © Clyde & Co US LLP 2015 John R. Keough, Partner