Handling Of Taxation In Equity Transfer Of Foreign-invested Enterprises

With the deepening of China's reform and opening, as well as the maturing of China's market economy, the transfer of shares also frequently occurs to enterprises, many of which are foreign-invested enterprises. Therefore, foreign-funded enterprises constantly come to consult how to deal with the taxation in equity transfer. Now, on the tax issues involved in the transfer of foreign equity; we give our introduction and explanation as follows.

Equity transfer means the shareholder transfer all the equity stock or company shares he possesses to others, which is one situation of equity reconstructing. Equity reconstructing implies the corporate shareholders (investors), the amount or the proportion of shares held by shareholders change. Equity reconstructing of enterprises, as investment and trade practices of shareholders, belonging to the reorganization of corporate ownership structure, will not affect the survival of enterprises. Enterprises are not required by the liquidation proceedings, and claim and debt relationship will continue to be in effect after the restructuring of equity. In 1997, the State Administration of Taxation promulgated the "Provisional Regulations of Dealing with the Business Income Tax on the Merger, Separation, Equity Restructuring and Assets Transferring of Foreign-Invested Enterprises". In the chapter of the restructuring of the foreign equity stake, there are provisions on the issue of transfer of the tax: 1

If foreign-invested enterprises and foreign enterprises transfer their ownership of shares or the shares of the gains----the transfer of equity income, the income tax should be paid or withheld according to the rules and the relevant provisions in tax law and its implementation. Gains or losses on share transfer refer to the balance after the transfer of equity shares minus the cost price.

The price of equity transfer refers to the sums including cash, or interests of non-monetary assets and other forms of payment the transferor acquire from the transfer. If they are holding the undistributed profits tax or movements of all kinds of Funds retained earnings to shareholders drawing after the tax, the transferor will transfer their ownership in conjunction with the transfer of the right of the shareholders at the price of retained earnings. The transfer of such shares belongs to the person's amount of investment income, which is excluded the transfer price for the shares.

Cost price of the equity is the amount of contributions delivered by the shareholders (investors) and invested in stocks in practice, or the actual purchasing price paid to the assignor when purchase the rights.

Take a foreign-invested enterprise for example, if the foreign investors want to transfer all the shares to another enterprise, the handling of taxation in the share transfer formalities should be carried out as following:

1. if the foreign investor is the individual, the tax issues about the transfer of the equity should be consulted to the local Revenue Department. If the foreign investor is the enterprise2, it should pay for the corporation income tax according to the "People's Republic of China Enterprise Income Tax Law" the third paragraph from the third article and the forth article, since it was introduced on January 1, 2008. The tax rate is 20%. That is to say, the 20% of transfer of shares revenue should be imposed for tax.

2. the foreign-invested enterprises in accordance with the properties of business income determine whether to share the tax benefits. If Enterprise revenue accord with the "People's Republic of China Enterprise Income Tax Law" and other related laws and regulations about income with tax breaks, it will enjoy the tax benefits.

3. if the foreign-funded enterprises will be transferred to a domestic enterprise, after the transfer of business ownership occurred, the property of enterprises becomes into the domestic capital from the foreign capital. According to "Law of the People's Republic of China Concerning the Administration of Tax Collection" and the rules of implementation, the original foreign-invested enterprises should transact the tax liquidation and the log-out procedures, and re-apply for tax registration for the domestic enterprise.



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1. Refer to chapter 3 of the "Provisional Regulations of Dealing with the Business Income Tax on the Merger, Separation, Equity Restructuring and assets transferring of Foreign-invested Enterprises" about the handling of the taxation in equity restructuring ;
2. Refer to article 2 of "People's Republic of China Enterprise Income Tax Law". Enterprises are divided into resident enterprises and non-resident enterprises. Non-resident enterprises involved in this law refers to the enterprises set up according to the foreign law, the actual management organ is not within the territory of China, but establish institutions and locations in China, or else have income within China.