Company: XHG
Filing Date: 2025-01-22
Form Type: 20-F
Source: 0001213900-25-005499
Chunk: 50

Company: XChange TEC.INC
Filing Date: 2025-01-22
Form: 20-F
Item: Item 3
Chunk 50
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of Taxation issued the Circular on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises (“ Circular
7”), which replaced or supplemented certain previous rules under the Notice on Strengthening Administration of Enterprise Income
Tax for Share Transfers by Non-PRC Resident Enterprises (the “ Circular 698”), issued by the State Administration of Taxation
on December 10, 2009. Circular 7 sets out a wider scope of indirect transfer of PRC assets that might be subject to PRC enterprise income
tax. Circular 7 also includes detailed guidelines regarding when such indirect transfer is considered to lack a bona fide commercial
purpose and thus regarded as avoiding PRC tax. On October 17, 2017, the SAT issued the Announcement on Issues Relating to Withholding
at Source of Income Tax of Non-resident Enterprises (the “ SAT Circular 37”), which came into effect on December 1, 2017 and
was amended on June 15, 2018. SAT Circular 37 further clarifies the practices and procedures for withholding non-resident enterprise
income tax.

The conditional reporting obligation of the non-PRC
investor under Circular 698 is replaced by a voluntary reporting by the transferor, the transferee or the underlying PRC resident enterprise
transferred. Using a “substance over form” principle, PRC tax authorities may disregard the existence of the overseas holding
company if the company lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC
tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, currently at a rate of 10%,
and the transferee has an obligation to withhold tax from the sale proceeds.

Gains from the sale of shares by investors through
a public stock exchange are not subject to the PRC enterprise income tax pursuant to Circular 7 where such shares were acquired in a
transaction through a public stock exchange.

There remains uncertainty as to the application
of Circular 7 and the SAT Circular 37. PRC tax authorities may determine that Circular 7 and the SAT Circular 37 are applicable to offshore
restructuring transactions or sale of the shares of offshore subsidiaries where non-resident enterprises, as the transferors, were involved.
PRC tax authorities may pursue such non-resident enterprises with respect to a filing regarding the transactions and request the PRC
subsidiaries to assist in the filing.