Mr. Jones wants to transfer his equity in Pharmaceutical Development Ltd. to Mr. Meyer for the original value of 1 million RMB (even if the current assessment made by the tax authorities is 20 million RMB). Therefore he must provide the tax authorities with proof of the equities original value, from when it was established.
If Mr. Jones fails to deliver the valid proof to the tax authorities of the original equity – the equity transfer might drag out and be very complicated. In some cases he will even be liable for tax fraud and probably investigated by the tax authorities.
From the 1st of January 2015 new rules will be implemented for individual income tax on income from equity transfers. To understand what this means for you, it is important to be aware of a few things.
What is an equity transfer?
An equity transfer refers to the act that a individual or a company transfers equity that they own to another legal person. In this action the person whom transfers the money is the taxpayer, while the person to whom the money is transferred is the withholding agent. An equity transfer is:
- General sale of equity
- The repurchase of equity by a company
- The case that a issuer (the taxpayer) makes a public offering on shares, sale of shares held by shareholders of the recipient (withholding agent) by way of public offering.
- Mandatory transfer of equity by a judicial or administrative authority;
- make foreign investment or other non -mandatory transaction with equity;
- use of equity to cover the debt;
- and other equity transfers.
How income from equity transfers is recognized
Income from a equity transfer shall be determined in accordance with the principle of fair trade where cash, negotiable securities and other forms of economic interests are acquired by the initiator (taxpayer) from the equity transfer.
The tax authority may verify the income from an equity transfer where the declared income is obviously low for no justifiable reason, and where the transferor cannot provide or refuses to provide the information relating to the transfer, etc.
What risks appear and what should i take into account
Investors must pay attention to the income of an equity transfer that is obviously low, and also where the declared income from an equity transfer is lower than the amount of net assets corresponding to the equity. For the above reasons, the tax authority may inspect and verify the income from the equity transfer unless the low equity transfer contains justifiable reasons such as:
- Significant production and operation impacts due to the national policy adjustments.
- Equities are succeeded by or transferred to the individual’s spouse, parents, children, grandparents etc. Legally valid proof of identity relationship must be provided.
- Other reasonable circumstances where both parties to the equity transfer can provide valid evidence to prove the reasonableness.
Exchange rate of the settlement day
Foreign investors should note that the taxable income for equity transfer is calculated in accordance with the RMB amount converted from the middle price of the RMB exchange rate on the settlement day.
Grace Shi is a partner at ECOVIS Beijing China. She has over 12 years of experience in accounting, auditing, and tax advisory services in both international accounting firms and large Chinese corporations. She has an international MBA and a US Global Finance Master’s degree. Since 2001, she is a Chinese Certified Public Accountant (CPA) and, since 2002, a Chinese Certified Taxation Agent (CTA). Mrs. Shi is one of the founders of ECOVIS R&G Consulting Ltd. (Beijing). She has perfect skills in written and spoken English and Chinese. For more information, please contact: firstname.lastname@example.org
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