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Equity Transfer


Chinese-foreign Equity Joint Ventures, Chinese-Foreign Contractual Joint Ventures, Wholly Foreign Owned Enterprise (hereinafter referred to as three types of foreign-funded enterprises), after registered and established according to the law in China, original registered capital or investors investment ratio may change due to various reasons, resulting in changes of investor share. The place of offshore company registration that Taiwanese Businessman often choose, procedures of ownership change are simple and fast. The final object of equity transfer after all is China entities enterprises, whether listed in Taiwan, foreign quoted share, introduce a strategic investor or equity restructuring carried out by the shareholders, can’t avoid need for group investment reorganization occurred the case of the territory of China corporate equity indirect transfer. Introduction of No. 698 and follow-up throughout collection practices cases let companies need to re-examine and assess the practice for years in the past to bring tax risk of the enterprise. Therefore, before making such an equity transfer transaction, you should understand or consult professionals about the latest laws and local tax authorities from carrying out practices and efforts to make the decision after careful assessment, in order to avoid inadvertently increasing business risk.

A. The company go through the relevant change specification

When foreign-invested enterprises subject to mergers and acquisitions, and equity transactions selected to implement mergers and acquisitions, often face domestic transactions and export transactions the two options. Due to the changes offshore company shareholders and person in charge occurs and the transferee as a new shareholder of Chinese companies need to separate the legal representative and appoint directors and supervisors and other personnel, who must apply for change of registration or filing location of the company to China's relevant departments. It should be noted that, due to the corresponding change of the person in charge investors, many local approval authorities will ask for the new person in charge of offshore companies on public authentication certificate and other relevant documents.

Ⅰ. For domestic transactions, especially attention to the payment of share particular. Under the State Administration of Foreign Exchange, after the buyer obtaining the approval documents of foreign exchange to the payment of the shares to the seller, and the payment of share should be paid off at one time.

While offshore transaction, the payment of share between buyers and sellers without getting prior approval or approval of any China official sector, buyers and sellers can have more time and space for a freely negotiated way of the payment of share.

B. Domestic / Offshore trading for equity trading taxation issue

Ⅰ. Transfer of Remitted (offshore) Stock Income Tax

When domestic and offshore direct dealing, in accordance with equity transfer income (equity transfer income minus the equity transfer costs) Samoa A need to transfer of shares multiplied by 10% paid by non-residents corporate income tax. Equity transfer income generally agreed equity transfer price by buyers and sellers, generally the price can't less than the transfer base date of the book net assets of Chinese A, if tax authorities required assess the value of the equity, can be real estate appreciation, leading to equity assess price is greater than the book net assets, at this time, tax authorities will assess the price of the equity income recognized equity transfer. Indirect offshore transactions, in accordance with the provisions of No. 698, should report to the tax authorities of China A from the date of signing of the share transfer contract in 30 days; after approval of SAT, can be regarded as the direct transfer of China A equity to taxation.

Ⅱ. Profit distribution Income Tax

After domestic transaction, China enterprises no need to levy tax from distribution of profits of China A; but China enterprises will eventually distribute profits to individual shareholders, domestic individual must pay 20% of personal income tax, foreign individual no need to pay the tax; after offshore transaction acquiring offshore company the need to pay 10% of the income tax on non-tax-resident enterprises from distribution of profits of China A(with tax convention and eligible can use conventional tariff).

Ⅲ. Attention

Purchase shares of foreign invested enterprises, it should be based on the assets, financial situation and the specific circumstances of the buyers and sellers of the target company, planning transactions, not just consider the tax factor. According to the provisions of Circular 698, if there really have the equity transfer income tax, offshore indirect transaction can't risk tax exemption.

C. The basic files to prepare for change of equity transfer

Equity transfer agreement between the corporate investors need agree by other investors parties, its affiliates or equity transfer of other assignee, the assignor and assignee shall sign agreement of equity transfer, the main contents should include: The name, address, legal representative of the name, position, nationality of the assignor and assignee; share and price of equity transfer; contange day and manner of equity transfer; assignee enjoy the right and commitment according to  enterprise contract and articles of associationed; responsibility breach of contract; applicable law and dispute settlement; come into force and termination of the agreement; time and place of agreements. With particular attention to the applicable law and dispute settlement, the law must apply to the China.

D. Latest Practice Case

From 10 December 2009 through offshore company indirect transfer of shares China residents enterprise will be taxed, the SAT issued Guoshuihan No. 698 "Strengthening the Management of Enterprise Income Tax Collection of Proceeds from Equity Transfers by Non-resident Enterprises"

[Equity transfer transaction reporting norms]

Case instructions:

The biggest impact of No. 689 on enterprises is that the tax authorities will be strengthen to equity transfers by non-resident enterprises. In the past most of the foreign enterprises set up several offshore companies to indirectly invest in China; and subsequent increases joint venture partners or equity transfer, often through transfer offshore company equity to indirect achieve the effect of transfer China companies equity. After release Guoshuihan No. 698, for the preceding transaction has been clearly declare of norm, and its related provisions as follows:

  1. Nonresident enterprises shall file and pay the enterprise income tax to the competent tax authority supervising the Chinese resident enterprises whose equity interests are transferred (i.e., the tax authority in charge of collecting enterprise income tax of such resident enterprise) within seven days after the equity transfer date as agreed in the contracts or agreements (or after the date when the proceeds are actually obtained, if the transferors receive the proceeds of equity transfers in advance). If non-resident enterprises fail to file timely and accurately, the relevant provisions in the Tax Collection and Management Law of the People’s Republic of China shall apply.
  2. When the offshore investor (actual controlling party) indirectly transfers the equity interests in a Chinese resident enterprise, if the actual tax burden in the jurisdiction of the offshore holding company being transferred is less than 12.5%, or if such jurisdiction exempts income tax on foreign-sourced income for its tax residents, the following documents should be provided to the tax authority supervising the Chinese resident enterprise whose equity interests are transferred, within 30 days after signing the equity transfer agreement:
    1. Equity transfer agreement/contract;
    2. The relationship between the offshore investor and the offshore holding company being transferred in terms of capital, operation, sales and purchase etc.;
    3. Introduction of operation, employees, bookkeeping, and assets of the offshore holding company being transferred by the offshore investor;
    4. The relationship between the offshore holding company being transferred by the offshore investor and the Chinese resident enterprise, in terms of capital, operation, sales and purchases;
    5. Explanation of the reasonable business purpose with respect to the offshore holding enterprise being transferred by the offshore investor;
    6. Other materials requested by the tax authority.
  3. If the offshore investor (actual controlling party) indirectly transfers the equity interests in a Chinese resident enterprise via abuse of organization forms and certain enterprise income tax obligations are avoided without a reasonable business purpose, after being reported to higher authorities and reviewed by the State Administration of Taxation, the supervising tax authority can decide the nature of the transaction of such equity transfer according to its business substance and deny the existence of the offshore holding company which is used for tax planning purposes.
  4. If the capital gain derived from an equity transfer by a non-resident enterprise is qualified for special tax treatment provided by Caishui [2009] No. 59 and such non-resident enterprise chooses the special restructuring method, written documentations should be submitted to the supervising tax authority to prove such qualification, subject to approval from the provincial tax authority. 

In summary, the current commonly used foreign investment in China offshore holding company registration, such as: the British Virgin Islands, Cayman Islands, Samoa, Hong Kong and other places, are in compliance with the aforementioned offshore holding companies where the country (region) actual tax burden negative less than 12.5% or its residents foreign income do not levy income tax provision, therefore the transfer of offshore companies equity have a duty to record the tax authorities. In practice China tax authorities has identified as long as non-entities offshore companies equity transfer, this behavior, will regarded as the direct equity transfer of China companies.

Notice of the State Administration of Taxation on Strengthening the Management of Enterprise Income Tax Collection of Proceeds from Equity Transfers by Non-resident Enterprises

Guoshuihan [2009] No. 698

The administrations of state taxes and administrations of local taxes of all provinces, autonomous regions, municipalities directly under the Central Government, and cities under separate State planning:

To standardize and strengthen the enterprise income tax collection and management of proceeds from equity transfers by non-resident enterprises, in accordance with the Enterprise Income Tax Law of the People’s Republic of China and its Implementing Rules, the Tax Collection and Management Law of the People’s Republic of China and its Implementing Rules, the Notice of the State Administration of Taxation on Printing and Distribution of Provisional Administrative Measures on Enterprise Income Tax Withholding at Source for Non-resident Enterprises (Guoshuifa [2009] No. 3), as well as Circular of the Ministry of Finance and the State Administration of Taxation on Several Issues on Corporate Income Tax Treatment of Corporate Restructuring Transactions (Caishui [2009] No. 59) relevant issues are hereby clarified as follows:

  1. Proceeds from an equity transfer as referred to in this circular represents proceeds from the alienation of the equity interests in Chinese resident enterprises (excluding the purchase and sale of the stock of Chinese resident enterprises on public securities markets) by non-resident enterprises;
  2. Where the withholding agent fails or is unable to fulfill its withholding obligations, nonresident enterprises shall file and pay the enterprise income tax to the competent tax authority supervising the Chinese resident enterprises whose equity interests are transferred (i.e., the tax authority in charge of collecting enterprise income tax of such resident enterprise) within seven days after the equity transfer date as agreed in the contracts or agreements (or after the date when the proceeds are actually obtained, if the transferors receive the proceeds of equity transfers in advance). If non-resident enterprises fail to file timely and accurately, the relevant provisions in the Tax Collection and Management Law of the People’s Republic of China shall apply.
  3. Proceeds from equity transfer refers to the difference between the consideration of the equity transfer minus the cost of the equity interest; Consideration of the equity transfer represents the total amount received by the transferor in the form of cash, non-monetary assets or interests with respect to the equity transfer; if the investee enterprises have retained earnings or after-tax reserves and such retained earnings and after-tax reserves are transferred to the transferee along with the equity interests being alienated, such amount of retained earnings and after-tax reserves shall not be deducted from the consideration of the equity transfer; Cost of the equity interest represents the capital contribution actually paid to the Chinese resident enterprises when the transferor made such investment, or the consideration actually paid to the prior transferor when the equity interests were purchased;
  4. In calculating the proceeds from equity transfers, the currency used by non-resident enterprises to make investments into Chinese resident enterprises whose equity interests are transferred, or the currency used to purchase such equity interests from the former investors shall be used to calculate the consideration of the equity transfer and cost of the equity interest. If a non-resident enterprise made investments for more than one time, the currency it used for the first investment shall be used to calculate the consideration of the equity transfer and cost of the equity interest, and a weighted average method shall be adopted to calculate the cost of the equity interest. Where different currencies were used in making the investments, the then-prevailing exchange rate on the date when the capital was injected shall be used to convert the currency into the one used for the first investment;
  5. When the offshore investor (actual controlling party) indirectly transfers the equity interests in a Chinese resident enterprise, if the actual tax burden in the jurisdiction of the offshore holding company being transferred is less than 12.5%, or if such jurisdiction exempts income tax on foreign-sourced income for its tax residents, the following documents should be provided to the tax authority supervising the Chinese resident enterprise whose equity interests are transferred, within 30 days after signing the equity transfer agreement:
    1. Equity transfer agreement/contract;
    2. The relationship between the offshore investor and the offshore holding company being transferred in terms of capital, operation, sales and purchase etc.;
    3. Introduction of operation, employees, bookkeeping, and assets of the offshore holding company being transferred by the offshore investor;
    4. The relationship between the offshore holding company being transferred by the offshore investor and the Chinese resident enterprise, in terms of capital, operation, sales and purchases;
    5. Explanation of the reasonable business purpose with respect to the offshore holding enterprise being transferred by the offshore investor;
    6. Other materials requested by the tax authority.
  6. If the offshore investor (actual controlling party) indirectly transfers the equity interests in a Chinese resident enterprise via abuse of organization forms and certain enterprise income tax obligations are avoided without a reasonable business purpose, after being reported to higher authorities and reviewed by the State Administration of Taxation, the supervising tax authority can decide the nature of the transaction of such equity transfer according to its business substance and deny the existence of the offshore holding company which is used for tax planning purposes.
  7. The tax authority can adjust the taxable income using reasonable methods, provided that the income is reduced as a result of an equity transfer of Chinese resident enterprise by a non-resident enterprise to its related parties not applying the arm’s length principle.
  8. If the offshore investor (actual controlling party) transfers its equity interests in several onshore and offshore holding companies simultaneously, the Chinese resident enterprises being transferred should provide the supervising tax authority with the agreements regarding the whole transaction and the agreement with respect to itself. If there is no separate agreement for the Chinese resident enterprise, it should provide to the supervising tax authority detailed information with respect to each of the holding companies being transferred, for the purpose of allocation of transfer amounts with respect to the domestic entity. The tax authority has the discretion to adjust the transfer amount if it cannot be allocated precisely.
  9. If the capital gain derived from an equity transfer by a non-resident enterprise is qualified for special tax treatment provided by Caishui [2009] No. 59 and such non-resident enterprise chooses the special restructuring method, written documentations should be submitted to the supervising tax authority to prove such qualification, subject to approval from the provincial tax authority.
  10. This Notice is effective from January 1, 2008. Issues in implementation of the Notice should be reported to the International Taxation Department of the State Administration of Taxation in a timely manner.