Beneficial Ownership and the Missing Fiscally Transparent Entity Rule in China’s Announcement No. 9: A Comparative Glance with EU Practice/ Le Li

Beneficial Ownership and the Missing Fiscally Transparent Entity Rule in China’s Announcement No. 9: A Comparative Glance with EU Practice/ Le Li

China’s Announcement No. 9 (2018) on beneficial ownership (“BO”) represents a major step in codifying anti-treaty-shopping rules in the Chinese treaty network. It refines the concept of “beneficial owner” through a multifactor test (business substance, functions, assets, risks, holding period, etc.) and empowers tax authorities to deny treaty benefits where an intermediary lacks sufficient economic substance. However, viewed from a comparative international tax and EU law perspective, one structural weakness emerges: the near-complete absence of a clear regime for fiscally transparent entities (FTEs).

In many double tax conventions, including the OECD and UN Model Conventions, the BO concept is intertwined with the question of who is treated as the income’s taxpayer. Where an entity is fiscally transparent, treaty benefits may be granted at the level of the partners, provided that they are residents of a contracting state and are treated as deriving the income for tax purposes. By contrast, Announcement No. 9 largely assumes that the “beneficial owner” is a company or other opaque vehicle claiming reduced withholding tax on dividends, interest, or royalties in its own name.

This creates a tension with the growing use of limited partnerships and other investment funds in inbound structures (including QFLP-type vehicles) where foreign limited partners may themselves be resident in China’s treaty partners. In the absence of an explicit transparent-entity rule, tax authorities may either (i) treat the intermediate partnership as a non-resident company and apply Announcement No. 9’s BO test to that entity, or (ii) simply deny treaty benefits on the ground that the immediate recipient is not a qualifying resident and no look-through is provided in the Announcement. Either way, foreign investors face legal uncertainty and the risk of economic double taxation, despite the underlying treaties being drafted broadly enough to cover income “derived by” residents through transparent structures.

From an EU perspective, the gap is striking. Within the EU, several layers of rules interact:

• At domestic level, many Member States explicitly recognise fiscal transparency of partnerships and provide look-through rules for treaty purposes.

• At EU law level, anti-abuse doctrines (as developed in cases like Danish Beneficial Ownership, though concerning directives) analyse substance and control without ignoring the transparent nature of certain vehicles.

• Moreover, the OECD’s 1999 Partnership Report and later BEPS work have influenced both EU and Member State practice in designing specific provisions to allocate treaty benefits where income flows through FTEs.

Compared with this, the Chinese approach in Announcement No. 9 appears conceptually one-dimensional: it focuses on “who is the real owner of the income” in an economic sense, but does not clearly answer “who is the treaty subject where the immediate recipient is fiscally transparent”. As a result, the BO test risks being applied at the “wrong level” in the chain, especially for private equity funds, joint ventures, and other pooled vehicles that are treated as fiscally transparent in foreign jurisdictions.

From a policy standpoint, this is problematic for at least three reasons.

First, it may over-kill genuine investment structures. Foreign investors who are themselves treaty residents may be denied reduced withholding simply because they invest via a partnership for regulatory or commercial reasons.

Second, the absence of a transparent-entity rule undermines predictability and administrability. Both taxpayers and tax officials lack clear guidance on how to reconcile domestic BO criteria with treaty provisions that implicitly assume look-through for FTEs.

Third, this asymmetry weakens China’s position in the emerging global minimum-tax and anti-avoidance environment. While many jurisdictions move towards coordinated anti-abuse rules that distinguish between abusive “conduit” entities and genuine transparent funds, China’s framework risks being seen as formalistic and source-oriented.

A possible way forward would be to complement Announcement No. 9 with explicit FTE guidance, drawing on OECD and EU experience: (i) recognising when a foreign entity is fiscally transparent under its home law; (ii) allowing treaty benefits at investor level if they are residents of the treaty partner and bear tax on the income; and (iii) applying the BO test at that ultimate-investor level, rather than at the partnership level. This would better align China with international standards, reduce disputes, and preserve the integrity of Announcement No. 9 as a targeted anti-avoidance instrument rather than a blunt barrier to cross-border investment.