Chinese authorities are enforcing more consistently "anti-tax avoidance" measures, including tax on equity transfer of China resident and non-resident enterprises. During the process of transferring equity, both individual and corporate shareholders are responsible for various taxes.
The act of transferring equity by a shareholder to another individual or legal person is called equity transfer and is a common business practice.
Disposal of equity, equity buyback by the company, mandatory transfer of equity by the judicial or administrative transactions, use of equity for the external investment or any other non-monetary transaction o use of equity for offsetting of debts; all these fall under the equity transfer umbrella and are taxable in China.
It is also considered equity transfer when an issuer makes an initial public offering of new shares, and a shareholder of the enterprise sells their shares to investors in the public offering. Under the tax laws, equity is one kind of “property” in China.
According to the Implementation Regulations for the Corporate Income Tax Law of China (CIT implementation Regulation), the term “income from transfer of property” refers to the income obtained by an enterprise from the transfer of fixed assets, biological assets, intangible assets, equity, and creditor’s rights, etc.
The Implementation Regulations for the Individual Income Tax Law (IIT Implementation Regulation) stipulates that income from the transfer of property shall mean income derived by individuals from the transfer of priced securities, equity, share of properties of a partnership enterprise, immovable property, machinery and equipment, vehicles and vessels and other properties.
The tax rules applying to the transfer of property also apply to equity transfer, unless otherwise stipulated.
Individual shareholders who are involved in equity transfer must pay IIT and stamp tax. Income derived from the transfer of property (including equity) within China is deemed as income sourced in China and is subject to IIT. This is regardless of whether the payments take place in the country.
According to the Announcement of the State Administration of Taxation on Promulgation of the Administrative Measures on Individual Income Tax on Income Derived from Equity Transfer (Trial Implementation), in the case of equity transfer by an individual, the taxable income amount shall be the balance from deduction of the equity’s original value and reasonable expenses from the income derived from equity transfer, and the individual shall pay IIT as per “income from transfer of property”.
The tax rate for the income derived from the transfer of property is 20 percent. Reasonable expenses refer to taxes and fees paid at the time of the equity transfer pursuant to the provisions.
The person making the transfer is the taxpayer, while the person receiving the transfer is the withholding agent, who must inform the tax authorities about the transfer within five working days from the signing of the relevant agreement.
The enterprise issuing the shares is required to keep a detailed record of the costs incurred by its shareholders’ holding of the equity. It is also required to provide truthful and accurate information in relation to the equity transfer to the tax authorities and assist the tax authorities in the enforcement of official duties pursuant to the law.
The stamp tax rate for equity transfer is 0.05 percent based on the amount stated in the property transfer document. If the document does not specify the amount, the stamp tax is determined based on the actual settlement amount. If the stamp tax basis cannot be determined, the market price at the time when the contract or property transfer document is concluded will apply.
In this case, the government-fixed price or government-guided price must be followed in accordance with the law, and the stamp tax will be determined by the state provisions.
Individual shareholders may benefit from some preferential tax policies. Since 2019, small-scale value-added tax (VAT) taxpayers can enjoy “six taxes and two fees” reductions within 50 percent of the tax amount. Stamp tax is among them. This is also available to small and low-profit enterprises (SLPEs) and self-employed individuals. The deadline for this policy has been extended to December 31, 2024.
Equity transfer of unlisted enterprises by individual shareholders is not subject to VAT and the transfer of equity of listed companies by individual shareholders is exempt from VAT.
The tax liability of equity transfer by corporate shareholders is differentiated for resident enterprises and non-resident enterprises. The types of taxes are CIT, stamp tax, VAT (where applicable), and land appreciation tax.
An enterprise established in China according to Chinese law (including a WFOE, JV, or FICE) or a foreign company whose administrative organ is located in China is considered a resident enterprise.
A non-resident enterprise is a company established according to foreign law, whose administrative organ is not located in China, but has an office or establishment in the country or a foreign enterprise, which does not have an establishment in China, but has income generated from China.
The CIT Implementation Regulation states that the source of income from equity investments shall be determined pursuant to the location of the investee enterprise.
The taxable income amount for equity transfer income is the balance after deducting the equity net value from the equity transfer income.
Equity transfer income refers to the consideration collected by the equity transferor making the transfer from the equity transfer itself. This includes various monetary and non-monetary incomes.
The equity net value is the capital contribution costs paid by the equity transferor making the equity transfer to a Chinese resident enterprise at the time of investment and equity participation. Alternatively, it is the equity transfer costs paid at the time of the acquisition of the equity from the person or entity originally transferring the equity.
When an enterprise calculates the income from the equity transfer, it must not deduct the amount that may be distributed according to the transferred equity from the shareholders’ retained earnings, such as undistributed profits and other earnings of the enterprise issuing the equity.
In the event of partial transfer of equity under multiple investments or acquisitions, the enterprise shall determine the costs corresponding to the transferred equity in accordance with the transfer ratio out of all costs of the equity.
Under normal tax treatment for equity transfer, for corporate shareholders that are resident taxpayers in China, the equity transfer income will be aggregated into annual profit and subject to CIT at the company’s applicable tax rate. Currently, the standard CIT rate in China is 25 percent. Reduced CIT rates are available based on the entity type, size, sector, or locations
For corporate shareholders that are non-resident taxpayers, income from equity transfer in China is subject to CIT at a reduced tax rate of 10 percent.
The stamp tax levied on corporate shareholders engaged in equity transfer is the same as that for individual shareholders.
If the transfer of equity involves the transfer of financial commodities, general VAT taxpayers are subject to VAT at a rate of six percent. Small-scale VAT taxpayers are subject to a three percent VAT levy rate. Both general VAT taxpayers and small-scale taxpayers can only issue general VAT invoices for this kind of transaction.
If the equity being transferred is mainly made up of land use rights, above-ground buildings, and attachments, the transfer will be subject to a land appreciation tax as well.
Calculation of land appreciation tax is based on the appreciation amount gained by the taxpayer through the transfer of real estate (i.e., the balance of the proceeds received by the taxpayer on the transfer of real estate after deducting the sum of deductible items) and should be levied in accordance with a four-step progressive tax rate. The tax rate ranges from 30 percent to 60 percent.
To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com.
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.