Q:
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what taxes should be paid by shareholders for divestment?
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A:
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Shareholder divestment is divided into individual divestment and enterprise divestment.
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1.
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According to Announcements on Individual Income Tax on Funds Recovered from Termination of Individual Investment and Management by State Taxation Administration (STA) [No.41 2011], if shareholders terminate investment and joint management for various reasons, the income of it from equity transfer, liquidated damages, compensation, and other recovery income are classified as individual taxable income.
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2.
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According to Announcement on Enterprise Income Tax by STA [No.34 2011], when enterprises withdraw or minimize investment, the proportion equivalent to initial investment should be recognized as investment recovery from acquired assets. The part equivalent to accumulated undistributed profits and surplus reserves in accordance with the proportion of reduced paid-in capital should be recognized as dividend income. The remaining portion of acquired assets should be regarded as income from equity transfer.
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Q:
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What is the difference between divestment and equity transfer?
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A:
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For divestment, the undistributed profits and the corresponding part of surplus reserve are tax-free. While the income from equity transfer, should not deduct the amount of retained earnings such as undistributed profits in other companies. Undistributed profits and the corresponding part of surplus reserve are taxable.
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Q:
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What is the difference between divestment and liquidation?
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A:
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Compared to liquidation, the sequence of disposal for divestment is different. When enterprise process to liquidation, it should calculate the remaining assets by deducting all kinds of expenses, such as liquidation expenses, employee salaries, social insurance expense and statutory compensation, liquidation income tax and so on, from realizable value or transaction price. After that, firstly is to confirm shareholders dividends and bonus base on the proportion of capital investment. Secondly is to allocate the balance between remaining assets and dividend income according to the proportion of investment. Finally, calculate the profit of loss from equity transfer. Dividend income is tax-free for eligible investors.
While the fist step for divestment is to confirm the recovery of investment, then dividends and bonus, finally is profits or loss for equity transfer.
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Q:
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What are tax risks implied on shareholder divestment?
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A:
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According to the relevant provisions of Chinese Company Law, enterprises need to go through legal procedures if they need to withdraw their capital. For enterprises reducing paid-in capital and returning to investors in proportion without any legal formalities, the retuning capital is likely be identified as bonus instead of divestment by tax authorities. In this circumstance, enterprises may result in tax inspection for evading paying income tax.
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Q:
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What are tax risks implied if shareholder divestment is regarded as equity transfer?
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A:
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According to Announcements on Individual Income Tax on Funds Recovered from Termination of Individual Investment and Management by STA [No.41 2011], if shareholders terminate investment and joint management for various reasons, the income of it from equity transfer, liquidated damages, compensation, and other recovery income are classified as individual taxable income.
Besides, according to Announcement on Administration of Individual Income Tax from Equity Transfer (Trail) by STA [No.57 2014], income from equity transfer should be determined in accordance with the principle of fair trading. The competent tax authority may verify the income from equity transfer if it declared by taxpayers is significantly lower than the value of corresponding net assets while without justifiable reasons.
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