Lessons from Jushi Group's Egypt share-transfer case for resolving international tax disputes

When a Chinese listed company transfers the shares of an overseas subsidiary, where should tax be paid — China or the host state? A seemingly simple question once put Jushi Group, the world's largest fibreglass producer, within reach of RMB 140 million in irrecoverable tax. This cross-continental dispute between Asia and Africa ultimately ended with the Chinese position fully accepted by the Egyptian tax authorities.

01 — The calm before the storm: an "ordinary" share transfer

In early 2020, China Jushi (600176)'s wholly-owned subsidiary Jushi Group quietly initiated an overseas-asset optimisation plan. The target was a 24.99% stake in Jushi Egypt Fibreglass Co., Ltd. ("Jushi Egypt") — a manufacturing enterprise located in the China–Egypt Suez Economic and Trade Cooperation Zone in Suez Governorate, Egypt. With a total investment of USD 857 million, it is one of China's largest industrial investments in Egypt and a flagship of China–Egypt production-capacity cooperation, in operation since 2012.

The process was textbook. In January 2020 the China Jushi board approved the transfer; from 4 to 31 March the equity was publicly listed on the Beijing Property Exchange; on 6 May, QIFEI LIMITED (under the China–Africa Production Capacity Cooperation Fund) successfully won the bid and signed the Equity Transfer Contract at a price of approximately USD 137 million (RMB 950 million). On completion, Jushi Group recognised investment income of more than RMB 700 million.

From a commercial perspective, this was a model capital operation — bringing in a strategic financial investor without losing control of Jushi Egypt, optimising the balance sheet and recycling capital for further international expansion.

02 — The divergence: Egyptian domestic law meets the China–Egypt treaty

Following the transaction, Jushi Group followed standard cross-border compliance practice, engaging an international tax adviser and consulting with the Egyptian local tax bureau on the filing obligations for the share-transfer gain. The response left management in a bind.

The Egyptian local tax office relied on Egyptian domestic tax law: drawing on the industry practice reflected in the China–Singapore tax treaty's interpretation — "where the transferor held at least 25% of the investee before the transfer, the source state has taxing rights" — the office took the position that Jushi Group, as a non-resident, was required to pay Egyptian withholding tax on the capital gain.

The external adviser separately recommended: pay the Egyptian withholding tax first, then claim a foreign tax credit in China at the annual CIT settlement.

At Egypt's then-applicable rate of around 20%, the Egyptian exposure was approximately RMB 140 million. Under the PRC CIT Implementation Regulations and the foreign-tax-credit rules, "taxes that a tax treaty provides should not be levied" fall outside the scope of creditable foreign tax.

In other words, had the company paid the Egyptian withholding tax without first applying for treaty relief and the payment was later confirmed as not due, the RMB 140 million would have become an irrecoverable sunk cost — pure double-taxation loss borne entirely by the company.

Faced with this dilemma, Jushi Group turned to the Tongxiang tax bureau under the Zhejiang Provincial Tax Service for professional support.

03 — The force of the treaty: decoding Article 13 of the China–Egypt DTA

The Tongxiang tax bureau's international-tax team launched a full-spectrum policy review. The centre of gravity was a bilateral legal instrument signed in 1997 and effective from 1999 — the Agreement between the Government of the People's Republic of China and the Government of the Arab Republic of Egypt for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the "China–Egypt DTA"), and in particular Article 13 ("Capital Gains").

Article 13 — Capital Gains

1. Income derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.
2. Income from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including income from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such fixed base, may be taxed in that other State.
3. Income from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to the operation of such ships or aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.
4. Income from the alienation of shares of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State.
5. Income from the alienation of shares other than those mentioned in paragraph 4 representing a participation of at least 25 per cent in a company which is a resident of a Contracting State may be taxed in that State.
6. Income from the alienation of any property other than that referred to in paragraphs 1 through 5 shall be taxable only in the Contracting State of which the alienator is a resident.

Applying the facts of the case to the China–Egypt DTA, paragraph by paragraph:

• Jushi Egypt is a manufacturing enterprise whose core assets are fibreglass production lines, plant and operating equipment — not "principally immovable property situated in Egypt". Article 13(4) does not apply.
• The stake transferred is 24.99% — below the 25% threshold in Article 13(5). Article 13(5) does not apply.
• No other special taxing rule applies, and the residual Article 13(6) assigns the taxing right solely to the transferor's residence state — China.

The legal logic is clear and direct; it does not require any elaborate interpretation. So where did the original Egyptian position go wrong?

The Egyptian local tax office and the external adviser reached the "Egypt has taxing rights" conclusion by importing an industry-practice line from the China–Singapore DTA — "the source state has taxing rights where the historic holding threshold was met" — and applying it directly to the China–Egypt DTA.

This reasoning contains two fundamental legal flaws.

First, the hierarchy of norms was inverted. A bilateral tax treaty is a formal treaty between two sovereigns. Its application rank is absolutely above the domestic tax law of either contracting state — a foundational principle of international tax administration and a basic rule established by the Vienna Convention on the Law of Treaties. The Egyptian local office's reliance on Egyptian domestic law to assert taxing rights effectively placed domestic administrative requirements above the priority of the bilateral treaty.

Second, the interpretation was applied across treaties without warrant. The provisions of different bilateral DTAs differ materially, reflecting the policy preferences, economic position and negotiating leverage of the contracting states. Interpretation must be grounded strictly in the text of the relevant treaty. The China–Egypt DTA's relevant clause, drawing on the UN Model's orientation toward "protecting the taxing rights of capital-exporting states", sets the threshold at the shareholding percentage at the time of transfer — there is no additional "historic-holding-test" condition. The external adviser's generalisation of the China–Singapore industry practice to the China–Egypt context was a textbook example of misapplied treaty interpretation.

04 — Multi-level engagement: the Chinese tax authorities' analysis

The Tongxiang tax bureau's international-tax team did not stop at directional guidance. It carried out a thorough, multi-dimensional policy review:

• Examining the transaction documentation: equity-transfer contract, listing announcements, equity valuation reports, Jushi Egypt asset composition.
• Studying the China–Egypt DTA, the UN and OECD Model Conventions and their Commentaries, Chinese tax guides for outbound investment to Egypt, and domestic foreign-tax-credit rules.
• Consulting leading domestic and international tax experts.

After several rounds of policy analysis, the team reached a clear conclusion that directly contradicted the external adviser's recommendation: the share-transfer gain should be subject to tax in China only. If the company paid Egyptian withholding tax without first submitting a formal treaty-relief application, the payment would be classified as "tax that the treaty provides should not be levied" and would be disallowed as a foreign tax credit in China.

Given the size of the amount, the treaty-interpretation issue and the implications for Chinese manufacturing multinationals investing abroad, Tongxiang escalated through the Zhejiang Provincial Tax Service and ultimately to the State Administration of Taxation (SAT), with the relevant provincial official travelling to SAT headquarters to brief the case in person.

05 — A professional response: three clear compliance steps

After consolidating the full factual record, the SAT's International Tax Department issued a clear three-step compliance path:

Step 1 — File the treaty-relief application first. The company had to submit, through proper channels, a formal written application to the Egyptian competent tax authority to claim China–Egypt DTA relief. This was the statutory precondition for any subsequent protection of its tax position.

Step 2 — Escalate via the Mutual Agreement Procedure (MAP) if needed. If the Egyptian competent authority formally declined to accept the application or to grant the treaty relief, the SAT would, under the relevant provisions of the China–Egypt DTA, formally initiate the Mutual Agreement Procedure (MAP) so that the central tax authorities of the two countries would resolve the double-taxation risk through bilateral negotiation.

Step 3 — Prepare the supporting record. The core materials included the PRC Tax Residency Certificate issued by the Chinese tax authority, all share-transfer legal documents, evidence of the investee's asset composition, and a description of the company's actual business. SAT took the lead, sending a formal official tax-communication letter to the Egyptian Central Administration for International Agreements — clearly setting out the Chinese authorities' professional reading of the treaty, with the key facts highlighted: 24.99% shareholding, operating manufacturing business, Article 13(6) of the China–Egypt DTA as the controlling provision.

After several rounds of internal deliberation, in October 2020, the Egyptian Central Administration for International Agreements issued a formal written ruling:

"Under the relevant provisions of the China–Egypt Double Taxation Agreement, the income derived by Jushi Group from the transfer of its 24.99% equity interest in Jushi Egypt shall be subject to corporate income tax only in its country of residence, China. Egypt, as the source state, has no taxing right."

This ruling directly overturned the Egyptian local tax office's initial position and eliminated the RMB 140 million double-taxation risk. The cross-border dispute was conclusively resolved.

06 — Deep read: the international-tax logic this case reveals

(i) The priority of bilateral tax treaties cannot be challenged

The most cautionary lesson of this case is the fundamental error made jointly by the external adviser and the Egyptian local tax office: placing the source state's domestic law above the priority of the bilateral tax treaty.

The international tax order rests on a foundational legal principle: bilateral tax treaties, as formal treaties between sovereigns, take priority over the domestic law of either contracting state. The legal basis is found in Articles 26 and 27 of the Vienna Convention on the Law of Treaties — a contracting state may not invoke the provisions of its internal law as justification for its failure to perform a treaty.

Applied to cross-border taxation: when a contracting state proposes to tax the cross-border income of a resident of the other contracting state, it must do so strictly under a taxing right expressly conferred by the treaty — it cannot, in the absence of such a right, unilaterally impose tax by reference to its own domestic law.

(ii) The "three-stage test" as the standard framework for cross-border share-transfer analysis

From an international-tax technical standpoint, Article 13 of the China–Egypt DTA in fact builds a logically-tight three-stage test. This framework is not only the analytical foundation for the Jushi case — it should be the standard analysis for treaty relief on any cross-border share transfer:

• Stage 1 — Immovable-property test. Does the property consist of, or principally of, immovable property located in the source state? If yes, the source state taxes first.
• Stage 2 — Substantial-holding test. If not, does the transfer meet or exceed the 25% shareholding threshold of the investee? If yes, the source state has taxing rights.
• Stage 3 — Residue. If neither condition is met, taxing rights belong solely to the transferor's residence state.

Jushi Egypt's transaction passed cleanly through all three stages: the assets are not Egyptian immovable property, the shareholding is below the 25% threshold, and there is no other special taxing provision — so the taxing right rests solely with China. This logic underpins the Egyptian authorities' final ruling, and serves as a standardised reference for treaty-relief analysis on similar cross-border share transfers going forward.