Tax Liabilities for Equity Transfer in China: An Introduction

Fairness switch is widespread in enterprise practices. Through the course of, each particular person shareholders and company shareholders are answerable for numerous taxes. Nonetheless, the particular tax implications are completely different for these two forms of shareholders. On this article, we offer a normal introduction to the tax liabilities of particular person shareholders and company shareholders in fairness switch in China.

What’s fairness switch?

Fairness switch refers back to the act of transferring fairness by a shareholder to a different particular person or authorized individual, together with the next circumstances:

• Disposal of fairness;
• Fairness buyback by the corporate;
• When an issuer makes an preliminary public providing of recent shares and a shareholder of the enterprise sells their shares to traders within the public providing;
• Necessary switch of fairness by the judicial or administrative transactions;
• Use of fairness for the exterior funding or every other non-monetary transaction;
• Use of fairness for offsetting of money owed; and
• Every other acts of fairness switch.

For the needs of this text, we solely talk about the switch of fairness or shares in an enterprise or group that a person invests in, excluding sole proprietorships and partnerships.

Furthermore, below related tax legal guidelines and rules, fairness is one type of “property” in China.

For instance, Article 16 of the Implementation Laws for the Company Earnings Tax Regulation of the Folks’s Republic of China (CIT implementation Regulation) stipulates that the time period “earnings from switch of property” talked about in merchandise (3) of Article 6 of the Company Earnings Tax Regulation of the Folks’s Republic of China refers back to the earnings obtained by an enterprise from the switch of fastened property, organic property, intangible property, fairness, and creditor’s rights, and so forth.

The Implementation Laws for the Particular person Earnings Tax Regulation of the Folks’s Republic of China (IIT Implementation Regulation) additionally stipulates that earnings from the switch of property shall imply earnings derived by people from the switch of priced securities, fairness, share of properties of a partnership enterprise, immovable property, equipment and tools, automobiles and vessels and different properties.

So, until it’s in any other case stipulated, the tax guidelines making use of to the switch of property additionally apply to fairness switch.

Tax legal responsibility of particular person shareholders in fairness switch

Particular person shareholders engaged in fairness switch are answerable for IIT and stamp tax.

IIT

Based on the IIT Implementation Regulation, earnings derived from the switch of property (together with fairness amongst others) inside China is deemed as earnings sourced in China and is topic to IIT in China. That is no matter whether or not the funds happen in China.

Based on the Announcement of the State Administration of Taxation on Promulgation of the Administrative Measures on Particular person Earnings Tax on Earnings Derived from Fairness Switch (Trial Implementation), within the case of fairness switch by a person, the taxable earnings quantity shall be the stability from deduction of the fairness’s authentic worth and cheap bills from the earnings derived from fairness switch, and the person shall pay IIT as per “earnings from switch of property”.

The tax fee for the earnings derived from the switch of property is 20 %. Affordable bills consult with the related taxes and charges paid on the time of the fairness switch pursuant to the provisions. The Announcement of the State Taxation Administration on Promulgation of the Administrative Measures on Particular person Earnings Tax on Earnings Derived from Fairness Switch (Trial Implementation) present detailed steerage on figuring out the taxable earnings, the fairness’s authentic worth, and the cheap bills.

The individual making the switch is the taxpayer, whereas the individual receiving the switch is the withholding agent. The withholding agent is required to report the related info of the fairness switch to the tax authorities inside 5 working days from the signing of the related settlement on the fairness switch.

The enterprise issuing the shares is required to maintain an in depth report of the related prices incurred by its shareholders’ holding of the fairness. It’s also required to offer truthful and correct info in relation to the fairness switch to the tax authorities and help the tax authorities within the enforcement of official duties pursuant to the legislation.

Stamp tax

The stamp tax fee for fairness switch is 0.05 % based mostly on the quantity acknowledged within the property switch doc. If the taxable contract or property switch doc doesn’t specify the quantity, the stamp tax is set based mostly on the precise settlement quantity. If the stamp tax foundation can’t be decided in accordance with the settlement quantity, the market value on the time when the contract or property switch doc is concluded will apply.

On this case, the government-fixed value or government-guided value have to be adopted in accordance with the legislation, and the stamp tax can be decided in accordance with the related provisions of the State.

There are some preferential tax insurance policies that particular person shareholders could profit from with regard to paying stamp tax.

Ranging from 2019, small-scale value-added tax (VAT) taxpayers can take pleasure in “six taxes and two charges” reductions inside 50 % of the tax quantity. Stamp tax is among the many six taxes and two charges.

As per the MOF STA Announcement [2022] No.10, this coverage is now accessible to small and low-profit enterprises (SLPEs) and self-employed people, along with small-scale taxpayers. And the unique deadline for having fun with this coverage has been prolonged from December 31, 2021 to December 31, 2024.

That’s to say, throughout the interval between January 1, 2019 and December 31, 2024, taxpayers that fall into the scope of SLPEs, small-scale taxpayers, or self-employed people can take pleasure in a 50 % stamp tax discount.

VAT

With regard to VAT, in response to the Discover of the Ministry of Finance and the State Administration of Taxation on the Full Launch of the Pilot Scheme on Levying Worth-added Tax in Place of Enterprise Tax (Caishui [2016] No. 36), presently, fairness switch of unlisted enterprises by particular person shareholders isn’t topic to VAT and the switch of fairness of listed firms by particular person shareholders is exempt from VAT.

Company shareholders

The tax legal responsibility of fairness switch by company shareholders is additional differentiated for resident enterprises and non-resident enterprises.

The forms of taxes concerned are CIT, stamp tax, VAT(the place relevant), and land appreciation tax(the place relevant).

CIT

Based on the CIT Regulation and the CIT Implementation Regulation, resident and non-resident taxpayers are taxed in another way. (See desk beneath.)

The CIT Implementation Regulation stipulates that the supply of earnings from fairness investments shall be decided pursuant to the situation of the investee enterprise.

Based on the Announcement of the State Administration of Taxation on Points Referring to Withholding at Supply of Earnings Tax of Non-resident Enterprises (State Administration of Taxation Announcement [2017] No. 37), the taxable earnings quantity for fairness switch earnings is the stability after deducting the fairness web worth from the fairness switch earnings.

Taxable fairness switch earnings = Fairness switch earnings – fairness web worth

Fairness switch earnings refers back to the consideration collected by the fairness transferor making the switch from the fairness switch itself. This contains numerous financial and non-monetary incomes.

The fairness web worth is the capital contribution prices truly paid by the fairness transferor making the fairness switch to a Chinese language resident enterprise on the time of funding and fairness participation. Alternatively, it’s the fairness switch prices truly paid on the time of the acquisition of the fairness from the individual or entity initially transferring the fairness.

The place there’s a discount or appreciation of worth throughout the fairness holding interval, and the positive aspects or losses are confirmed based mostly on the provisions of the finance and tax authorities of the State Council, the fairness web worth ought to be adjusted accordingly.

When an enterprise calculates the earnings from the fairness switch, it should not deduct the quantity that could be distributed in response to the transferred fairness from the shareholders’ retained earnings, corresponding to undistributed earnings and different earnings of the enterprise issuing the fairness.

Within the occasion of partial switch of fairness below a number of investments or acquisitions, the enterprise shall decide the prices equivalent to the transferred fairness in accordance with the switch ratio out of all prices of the fairness.

Beneath regular tax therapy for fairness switch, for company shareholders which might be resident taxpayers in China, the fairness switch earnings can be aggregated into annual revenue and topic to CIT on the firm’s relevant tax fee. At present, the usual CIT fee in China is 25 %. Diminished CIT charges can be found based mostly on the entity kind, dimension, sector, or areas

For company shareholders which might be non-resident taxpayers, earnings from fairness switch in China is topic to CIT at a lowered tax fee of 10 %.

Along with the conventional tax therapy, in response to Caishui [2009] No.59, State Administration of Taxation Announcement [2013] No.72, and Caishui [2014] No.109, fairness switch can apply particular tax therapy by satisfying sure circumstances, together with:

• There are cheap business aims, and the principle goal shall not be discount, exemption, or postponement of tax cost.
• The ratio of acquired, merged, or divided property or fairness shall adjust to the requirement ratio. For instance, in fairness acquisition, the fairness bought by the acquiror isn’t lower than 50 % of all fairness of the acquiree.
• The unique substantive enterprise actions of the restructured property shall not be modified inside 12 consecutive months following the enterprise restructuring.
• The cost quantity for fairness concerned within the consideration of a restructuring transaction shall adjust to the required ratio. For instance, in fairness acquisition, the fairness cost quantity of the acquiror incurred on the time of fairness acquisition isn’t lower than 85 % of the entire transaction cost quantity.
• The unique key shareholders who acquire the fairness in an enterprise restructuring shall not switch the fairness obtained inside 12 consecutive months following the restructuring.

There are additionally further necessities for fairness acquisition transactions between a home celebration and an abroad celebration (together with Hong Kong, Macao, and Taiwan) to use for the particular tax therapy, which embody:

• switch of the fairness of a resident enterprise held by a non-resident enterprise to a different non-resident enterprise through which it holds one hundred pc direct controlling shares, which doesn’t trigger subsequent change in withholding tax burden on earnings from switch of such fairness, and the transferor of the non-resident enterprise has offered a written endeavor to the tax authorities in cost that it’s going to not switch the fairness of the transferee of the non-resident enterprise owned by it inside three years (together with three years);
• switch of the fairness by a non-resident enterprise of the fairness of one other resident enterprise owned by the non-resident enterprise to a resident enterprise through which it holds one hundred pc direct controlling shares;
• funding by a resident enterprise with property or fairness it owns in a non-resident enterprise through which it holds 100% direct controlling shares; or
• every other circumstances authorised by the Ministry of Finance and State Taxation Administration.

And if a non-resident enterprise chooses particular tax therapy for fairness switch, it’s required to make record-filing with the tax bureau in cost inside 30 days after the fairness switch contract or settlement turns into efficient and the registration formalities with the native administration for market regulation are accomplished.

Beneath particular tax therapy for fairness switch, the tax base may very well be calculated in another way. For instance, in fairness acquisition:

• The tax base of the acquiror’s fairness obtained by the shareholders of the acquiree shall be decided in response to the unique tax base of the acquired fairness.
• The tax base of the acquiree’s fairness obtained by the acquiror shall be decided in response to the unique tax base of the acquired fairness.
• The tax base of the assorted authentic property and liabilities of the acquiror and the acquiree and different associated earnings tax issues shall stay unchanged.

In addition to, the tax cost may very well be deferred. For instance, in debt restructuring, for the half paid by fairness, the taxable earnings quantity could also be included averagely within the taxable earnings quantity of every yr in 5 tax years.

Stamp tax

The stamp tax levied on company shareholders engaged in fairness switch is similar as that for particular person shareholders.

VAT (the place relevant)

If the switch of fairness includes the switch of monetary commodities, normal VAT taxpayers are topic to VAT at a fee of six %. Small-scale VAT taxpayers are topic to a 3 % VAT levy fee. Each normal VAT taxpayers and small-scale taxpayers can solely problem normal VAT invoices for this sort of transaction.

Land appreciation tax (the place relevant)

If the fairness being transferred is especially made up of land use rights, above-ground buildings, and attachments, the switch can be topic to a land appreciation tax as nicely. Calculation of land appreciation tax relies on the appreciation quantity gained by the taxpayer via the switch of actual property (i.e., the stability of the proceeds acquired by the taxpayer on the switch of actual property after deducting the sum of deductible gadgets), and ought to be levied in accordance with a four-step progressive tax fee. The tax fee ranges from 30 % to 60 %.