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Administrative Measures on Share Transfer Made by Individuals
Circular Number: SAT Announcement [2014] No. 67
Issuance Date: 2014-12-7
Effective Date: 2015-1-1
During the past years, the SAT has issued various tax circulars, e.g. Guoshuihan [2009] No. 285 and SAT Announcement [2010] No. 27, to govern individual income tax (“IIT”) payable by individuals for capital gains arising from share transfers.
This Announcement was issued by the SAT on 7 December 2014 to replace the above old circulars and to provide comprehensive administrative measures in this respect. Among others, the Measures cover the following main aspects:
* General provisions
E.g. definition of share transfers made by individuals, definition of taxation income, tax subject and tax withholding agent, contract filing requirement, reporting obligation of the target company;
* Assessment of proceedings from share transfers
In particular, it has been clarified that certain post-share-transfer income shall also be treated as proceedings from share transfers. Under certain defined circumstances, the tax authorities are entitled to deem amount of share transfer proceedings by using several methods as defined by the Measures. The Measures also defined circumstances where the share transfer shall be regarded as significantly lowly priced and circumstances under which such low pricing may be justified.
* Assessment of original costs
Detailed rules are provided to assess the original costs of the shares being transferred. In particular, it has been clarified that in case of shares acquired via inheritance or donation from family members or close relatives or dependents, the original costs of the previous share transferor shall be considered.
* Tax declaration
The Measures clarified that the tax authority in charge of the target company shall be the competent tax authority for the IIT on the capital gains.
The timing of the tax declaration and payment is defined under different circumstances depending on the status of share price payment, effectiveness of the share transfer agreement, economic date of the share transfer, share transfer registration and so on.
The Measures provided detailed guidelines on IIT issues related to share transfers. For M&A projects involving individual shareholders, it is advisable to pay special attention to the Measures.
CIT issues related to Enterprise Restructurings
Circular Number: Caishui [2014] No. 109
Issuance Date: 2014-12-25
Effective Date 2015-1-1
Under PRC tax law, if an enterprise restructuring meets the conditions for special tax rules, it can be conducted in a tax neutral manner without triggering corporate income tax (“CIT”) payment. These conditions are set out by the tax circular Caishui [2009] No. 59 (“Circular 59”).
The current tax circular Caishui [2014] No. 109 was issued to loosen certain conditions defined by Circular 59. The adjustments are as follows:
* For share transfers, Circular 59 requires that the shares being transferred shall be no less than 75% of the total shares of the target company. This percentage requirement was reduced to 50%;
* For asset acquisition, Circular 59 requires that the transferee must acquire no less than 75% of the target company’s assets. Such percentage requirement was reduced to 50%;
* For assets or share transfer between a tax resident enterprise (“TRE”) and its 100% direct parent company(also being a TRE), or between TREs invested by the same TRE shareholder(s), special tax rules can be applied if the following conditions are met:
1) The assets or shares are transferred at book value;
2) The transfer has proper business reasons and is not mainly conducted to reduce, postpone or avoid taxes;
3) The relevant business operation continues for at least 12 months after the transfer;
4) Accounting wise, no gains or losses are recognized by the relevant parties.
* If the above conditions are met, no taxable income shall be recognized for the asset or share transfer and the tax base (costs) of the transfer shall be rolled over to the transferee. Compared with conditions for special tax rules for other restructurings, the above does not have a percentage requirement on the shares or assets being transferred.
CIT issues related to capital contribution in kind
Circular Number: Caishui [2014] No. 116
Issuance Date: 2014-12-31
Effective Date 2015-1-1
Under PRC tax law, when an enterprise (investor) transfers its non-cash assets to its invested enterprise, the investor shall recognise the relevant capital gains from such asset transfer for its CIT purpose.
This circular was issued to provide CIT deferral treatment to such capital gains. I.e. the gains can be included as taxable profits evenly within 5 years.
Please note that the circular took effect retroactively from 1 January 2014. Therefore, for those capital contributions in kind made in 2014, there is still a chance to enjoy the deferral treatment provided by the circular. Adjustments can be made during the annual CIT filing for the year 2014.
VAT refund rates adjusted for exportation of certain commodities
Circular Number: Caishui [2014] No. 150
Issuance Date: 2014-12-31
Effective Date 2015-4-1
As approved by the State Council, the SAT adjusted the applicable export VAT refund rates for certain commodities. The detailed list of commodities involved can be found here http://www.chinatax.gov.cn/n810341/n810755/c1456559/content.html.
New Sino-Switzerland Double Taxation Treaty comes into force
Circular Number: SAT Announcement [2015] No. 1
Issuance Date: 2015-1-6
Effective Date 2015-1-1
The SAT announced that the new Sino-Switzerland DTT has become effective since 15 November 2014 and shall be applied to income earned on 1 January 2015 or later.
