The State Administration of Taxation (SAT) of Hainan Province recently released a Letter (Qiongdishuihan [2013] No. 817) concerning the business tax (BT) issue of intragroup loan transactions. It refers to the “Notice Concerning Business Tax Issues of Collective Borrowing and Repayment of Non-Financial Institutions” (Caishuizi [2000] No. 7, hereinafter referred to as “Circular 7″) jointly released by the Ministry of Finance and the SAT of China, and reaffirmed that eligible intragroup loan transactions are not subject to BT.

Because lots of banks are worried about the credibility of small and medium-sized enterprises (SMEs) and the risk of bad loans, it is not easy for SMEs to obtain loans from banks. In order to solve their difficulties in financing, some SMEs ask for help from their parent company or core companies within the same enterprise group. The core company (the collective borrower), who is more like to get money from banks, would make collective borrowing and then onlend the loans obtained to the SMEs of the same group. The loan repayment would also be made by the collective borrower to the banks.

According to China’s Interim Regulation of Business Tax, generally, the interest income obtained from onlending transactions is considered sales and subject to 5 percent BT.

Circular 7 stipulates that the interest income obtained from intragroup onlending transactions are not subject to BT as long as the interest rate for the interest revenue equals to the interest rate held by the banks. If the interest rate for the onlending transactions is higher than the bank loan rate, the intragroup onlending transactions will be considered providing general loan services and subject to 5 percent BT. Circular 7 entered into effect on January 1, 2000.

The Letter released by Hainan SAT added that record filing at the competent tax authority is necessary for excluding BT obligation. The collective borrowers should have signed agreements specifically for the collective borrowing and repayment activities with both the financial institutions (the banks) and the enterprises receiving the onlended loans before they apply for the record filing. Proof of loan distribution is also required.

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