A landmark warning case on tax compliance has emerged for enterprises with red-chip structures! Zhiwen Group (formerly Momo Inc.) had its application for the 5% preferential withholding income tax rate under the China-Hong Kong tax treaty rejected by tax authorities when its domestic wholly foreign-owned enterprise (WFOE) distributed dividends to its Hong Kong affiliated company, and ultimately needs to pay a backdated withholding income tax of up to RMB 547.9 million. This case has become a typical warning for cross-border dividend tax compliance of enterprises with red-chip structures, sounding an urgent alarm for all enterprises adopting red-chip structures. On August 27, 2025, Beijing Momo, the wholly owned domestic subsidiary of Zhiwen Group, received a tax authority notice stating that it is no longer eligible for the 5% preferential withholding income tax rate under the China-Hong Kong tax treaty, and must withhold and pay tax at the 10% standard rate. This tax rate adjustment directly led the company to record an additional RMB 547.9 million in withholding income tax provisions. Of this amount, RMB 356.1 million relates to dividends paid in 2024 and the first half of 2025, and this portion of tax was fully paid in September 2025; the remaining RMB 191.8 million is a provision for undistributed retained earnings of Beijing Momo as of March 31, 2025. The tax authorities clearly stated that this backtax payment only covers the company's dividend distributions in prior periods and has no bearing on the company's current and future normal operations. However, it also requires that starting from the second quarter of 2025, Beijing Momo must withhold and provision withholding income tax at the 10% standard rate for all dividend payments to the Hong Kong affiliated company, which means the company's subsequent cross-border dividend tax costs will directly double. Why was the originally eligible 5% preferential tax rate rejected? The core reason is that the Hong Kong affiliated company under Zhiwen Group failed to meet the "beneficial owner" qualification under Chinese tax law, which is also the core threshold for red-chip structure enterprises to enjoy preferential treatment under the China-Hong Kong tax treaty. For enterprises with red-chip structures, when a domestic WFOE distributes dividends to a Hong Kong company, it can normally enjoy a 5% preferential withholding income tax rate under the China-Hong Kong tax arrangement, which is an important part of red-chip structure tax planning. However, enjoying this preferential treatment does not rely solely on a "single Hong Kong tax residence certificate", but requires meeting two strict compliance requirements: 1. The Hong Kong company must hold a valid and legal Hong Kong tax residence certificate; 2. Most importantly, it must meet the "beneficial owner" qualification under Chinese tax law. This qualification is an anti-tax avoidance rule established by China based on the OECD Base Erosion and Profit Shifting (BEPS) Action Plan, aimed at preventing the improper granting of tax treaty preferences. In short, the "beneficial owner" is not merely a legal shareholder, but must pass a series of assessments including economic substance test, dividend payment obligation test, functional risk test, and tax impact test of the contracting party, etc., to prove that it is not a "shell company" established solely for tax avoidance, but an entity that truly assumes relevant functions and risks and has actual business substance. The rejection of Momo's preferential tax rate essentially stems from its Hong Kong affiliated company failing this core test. In recent years, cases where tax treaty preferential treatment has been rejected due to failure to meet the "beneficial owner" qualification have been common. The Momo backtax case of over RMB 500 million once again sounds the alarm on tax compliance for red-chip structure enterprises. Red-chip structure is a common listing structure for enterprises in the internet, technology and other sectors to go public overseas. Tax planning for cross-border dividends, related party transactions and other links is an important part of it. However, against the backdrop of increasingly strict global anti-tax avoidance supervision and strengthened cross-border tax source management by Chinese tax authorities, the previous approach of simply relying on "setting up offshore shell companies" for tax planning is no longer feasible. Currently, tax authorities have become increasingly strict in reviewing "beneficial owner" qualifications, focusing on verifying whether overseas companies have actual business premises, personnel and assets, truly assume relevant business functions and risks, and whether there is tax avoidance suspicion of profit shifting to low-tax regions. Once identified as a "shell company", the enterprise will not only have the previously enjoyed preferential tax rate retroactively adjusted, but also need to pay back taxes, face the pressure of sharply increased tax costs, and may even affect the company's cross-border capital operations. Professional tax institutions have put forward four countermeasures to guide red-chip enterprises in tax compliance: 1. Carry out immediate self-inspection and rectification: Red-chip structure enterprises need to conduct a comprehensive self-inspection of the actual business substance, assumption of functional risks, retention of documents and other situations of their overseas non-resident enterprises (especially holding companies in Hong Kong, Cayman, BVI and other regions), and identify compliance loopholes in the "beneficial owner" qualification; 2. Strengthen economic substance construction: For overseas holding companies, improve their actual business structure to ensure that they have economic substance matching their shareholding scale and profit level, and avoid becoming "empty shell companies"; 3. Seek professional tax support: Cross-border tax compliance involves multiple aspects such as China-Hong Kong tax arrangements, OECD rules, and the actual business of the enterprise, which is highly professional. When necessary, enterprises should consult senior tax advisors to control tax risks through compliant and effective tax planning, rather than blindly pursuing tax preferences; 4. Improve document retention and evidence submission: Enterprises need to properly retain the business documents of overseas companies, proof of assumption of functional risks, financial vouchers and other materials, to ensure that they can provide sufficient evidence to prove their "beneficial owner" qualification when inspected by tax authorities. It can be clearly seen from the Momo backtax case of RMB 547 million that the core of current tax supervision has shifted from "formal compliance" to "substantive compliance". For red-chip structure enterprises, the premise of cross-border tax planning is always real business substance and strict compliant operations. Against the backdrop of the global anti-tax avoidance wave and strengthened domestic cross-border tax source supervision, any attempt to evade taxes by establishing "shell companies" and abuse tax treaty preferences will face strict supervision and retroactive adjustment by tax authorities. For red-chip enterprises, only by integrating tax compliance into the entire process of enterprise operation and capital operation, strengthening substantive operation, and improving the compliance system can they fundamentally avoid tax risks and ensure the smooth advancement of cross-border capital operations. This case also reminds the entire industry: the premise of tax preferences is compliance, the core of tax planning is authenticity. In an era of increasingly strict supervision, compliance is one of the core competitiveness of enterprises. © 2021 Meishun (Hong Kong) Management Consulting Co., Ltd. and Meishun (Hangzhou) Management Consulting Co., Ltd. All rights reserved. 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