The British Virgin Islands, where Baidu Holdings Limited, the sole shareholder of
certain of our PRC subsidiaries such as Baidu Online, was incorporated, does not have such a tax treaty with China.
Kong, where Baidu (Hong Kong) Limited, our wholly owned subsidiary and the sole shareholder of certain of our PRC subsidiaries such as Baidu Times and Baidu China, was incorporated, has a tax arrangement with China that provides for a lower
withholding tax rate of 5% on dividends subject to certain conditions and requirements, such as the requirement that the Hong Kong resident enterprise own at least 25% of the PRC enterprise distributing the dividend at all times within the 12-month period immediately preceding the distribution of dividends and be a beneficial owner of the dividends. However, pursuant to a SAT Circular 81 issued by the State Administration of Taxation in
February 2009, if the relevant PRC tax authorities determine, in their discretion, that a company benefits from the reduced withholding tax rate on dividends due to a structure or arrangement designed for the primary purpose of obtaining favorable
tax treatment, the PRC tax authorities may adjust the preferential tax treatment. Moreover, pursuant to a SAT Circular 601 issued by the State Administration of Taxation in October 2009, a resident of a contracting state will not qualify for the
benefits under the tax treaties or arrangements, if it is not the beneficial owner with respect to dividend, interest and royalty income. According to SAT Circular 601, a beneficial owner shall have ownership and right to
dispose of the income or the rights and properties giving rise to the income, and generally engages in substantive business activities. An agent or conduit company will not be regarded as a beneficial owner and, therefore, will not
qualify for treaty benefits. A conduit company normally refers to a company that is set up primarily for the purpose of evading or reducing taxes or transferring or accumulating profits. In August 2015, the State Administration of Taxation
promulgated the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatments under Tax Treaties, or SAT Circular 60, which became effective on November 1, 2015. SAT Circular 60 provides that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax rate. Instead, non-resident enterprises may, if they determine by self-assessment that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply for the reduced withholding tax rate, and file necessary forms
and supporting documents when performing tax filings, which will be subject to post-filing examinations by the relevant tax authorities.
If our PRC subsidiaries declare and distribute profits earned after January 1, 2008 to us in the future, the dividend
payments will be subject to withholding tax, which will increase our tax liability and reduce the amount of cash available to our company.
Under the EIT Law and its implementation rules, an enterprise established outside of the PRC with de facto management
body within the PRC is considered a resident enterprise and will be subject to the EIT at the rate of 25% on its worldwide income. The term de facto management body refers to the establishment that exercises substantial and
overall management and control over the production, business, personnel, accounts and properties of an enterprise.
Pursuant to SAT Circular 82 issued by the State Administration of Taxation in April 2009, an overseas registered enterprise
controlled by a PRC company or a PRC company group will be classified as a resident enterprise with its de facto management body located within China if the following requirements are satisfied: (i) the senior management
and core management departments in charge of its daily operations are mainly located in the PRC; (ii) its financial and human resources decisions are subject to determination or approval by persons or bodies located in the PRC; (iii) its
major assets, accounting books, company seals, and minutes and files of its board and shareholders meetings are located or kept in the PRC; and (iv) no less than half of the enterprises directors or senior management with voting
rights reside in the PRC. The State Administration of Taxation issued additional rules to provide more guidance on the implementation of SAT Circular 82 in July 2011, and issued an amendment to SAT Circular 82 delegating the authority to its
provincial branches to determine whether a Chinese-controlled overseas-incorporated enterprise should be considered a PRC resident enterprise, in January 2014. Although the SAT Circular 82, the additional guidance and its amendment only apply to