In generally, transactions between two independent enterprises include business transactions (sales, labor, financing, etc.) and donations. While transactions between shareholders and enterprises they invest includes business transactions, capital investment, dividend distribution, capital reduction and so on. Strictly speaking, there is not exist donations between shareholders and enterprises they invest, when compared with two independent enterprises. It is because shareholders will not loss any economic interest by transferring asset to enterprises they invest. Only the control format of shareholders on that asset is changed which is from direct control to indirect control. In the following is a brief analysis of the difference on taxation and accounting treatment for shareholders.

1. Accounting treatment
   
   The Ministry of Finance of the People’s Republic of China issued Notice on the 2008 Annual Report of Enterprises Implementing Accounting Standards (No. 60 2008), which stipulates that any donations and debt exemption received by enteprises shall usually be recognized as current income if they are eligible in accordance with the accounting standards. If enterprises receive direct or indirect donations from dominant shareholders or the shareholders’ subsidiaries, that donations will be regarded as capital investment by that dominant shareholers from the economic substance. Such investment shall be accounted as an equity transaction and the relevant gains shall be included in the owner’s equity (capital reserve). Hence, any donations and debt exemption between dominnat shareholdes and entrerprises they invest shall be regarded as capital investment on accounting.
   
   In No.5 Interpretation of the Accounitng Standards for Enterprises issued by the Ministry of Finance of the People’s Republic of China, it states that any debt repayment, debt exemption or donation received by enterprises shall be recognized as current income if they are eligible in accordance with the accounting standards. But, if enterprises received debt repayment, debt exemption or donations from minority shareholdes or the sharehoders’ subsidiaries directly or indirectly, those payments or donations will be regarded as capital investment by that minority shareholers from the economic substance.
   
   
2. Taxation Treatment
   
   In the No.29 announcement which is issued by the State Taxation Administration in 2014, it states that enterprises receive asset which is assigned by the shareholder, that is stipulated in contract or agreement to be used as capital or capital reserves and has actually been dealt with in accounting,  shall not be included in the total income of the enterprises. Such asset include the asset donated by shareholders, the asset donated by the original and new non-tradable shareholders to listed company  during the equity division reform, and the equity of the enterprises waived by shareholders. Enterprises should determine the tax basis for that asset based on its fair value. From the regulation, it can tell that asset donated by shareholders which is regarded as capital investment shall not be included into the total income of accepted enterprises. Accepted Enterprises shall determind the tax basis of accepted asset based on its fair value and shall not need to pay the enterprise income tax for it. At the meanwhile, all aforementioned transactions between shareholders and enterprises they invested are applicable by tax law, no matter whether the shareholders are dominant one or minority one.
   
   However, there is different in accounting and taxation treatment if a donation or conversion of debt to equity happens in two independent enterprises. The Accounting Standards for Business Enterprises stipulates that non-operational income of an enterprise, including donation gains, shall be included into the current profit and loss of the enterprise. In taxation treatment, the Enterprise Income Tax states that if enterprise receives donations income in monetary or non-monetary forms, such income shall be included into its total income. Hereby, it can tell when donation occurs between two independent enterprises, the donation-receiving enterprise shall account for the corresponding amount in the current profit and loss, and pay corporate income tax accordingly.

In summary, if donation occurs between shareholders and enterprises they invested, there are quite different in accounting and taxation treatment from those of independent enterprises. In practice, accoutants shall treat them differently to avoid wrong accounting treatment and tax declaration.

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