Individual Income Tax on Equity Transfer by Individuals
As you may know, China is one the most quickly evolving country and regulations are changing very often. In this context, yet another new notice was issue by Chinese government and fiscal authorities. We will describe in this article the changes and impact it will have on individuals.
Shenzhen Taxation Bureau of the State Administration of Taxation and Shenzhen Municipal Market Supervision Administration issued the “Notice on Further Standardization of Registration of Modifications on Equity Transfer by Individuals”, which implements joint management of IIT on equity transfer by individuals, effective from 18 June 2021.[1]
The Notice includes the following:
- If an individual undergoes modification registration for transfer of equities, before registering the modification with the market supervision and management department, the withholding agent or the taxpayer shall file a tax return with the competent tax authority in the location of the invested enterprise in accordance with the law.
- The Shenzhen Taxation Bureau of the State Administration of Taxation and the Shenzhen Market Supervision Administration implement an automatic interaction mechanism for information on equity transfer by individuals. After the Market Supervision and Administration Department confirms that the tax subject to the equity transfer by individuals has been declared and paid, it will register the modification of equity transfer for the invested enterprises in accordance with the relevant regulations.
- It takes 3 working days for the exchange of tax return information, therefore withholding the agent or the taxpayer is requested to apply for tax returns in advance as not to affect the registration of modification on equity transfer. If the IIT declaration related to equity transfer has been completed, but the registration of modification is affected by the information exchange, the withholding agent or the taxpayer should be asked to contact the competent tax authorities.
Legal Basis for Registration of Modifications on Individuals Equity Subject to IIT
Article 15 of the Individual Income Tax Law of the People’s Republic of China stipulates that “Where an individual undergoes modification registration for transfer of equities, the registration authority of the market participant shall verify the payment receipt of individual income tax related to the equity transaction.”
According to the law, the registration authority of an enterprise shall, in respect of a change of equity interest where the transferor is a natural person shareholder, promptly carry out the registration procedures based on the “Registration Form for Tax Source Monitoring of Change of Equity Interest of Natural Person Shareholders” (tax-paid voucher) issued by the taxation department.
Similar Notices Issued by Other Local Tax Bureaus in 2021
Notice on the Regulation of the Administration of Individual Income Tax on Equity Transfer
By the Guangxi Taxation Bureau
No. 5 of 2021 (effective from 1 June 2021)
Notice on the Regulation of the Administration of Individual Income Tax on Equity Transfer
By the Foshan Taxation Bureau
No. 1 of 2021 (effective from 19 April 2021)
When is an Asset Evaluation Audit required?
Article 21 of the “Measures for the Administration of Individual Income Tax on Income from Equity Transfer (for Trial Implementation)” stipulates that when a taxpayer or withholding agent files a tax (withholding) declaration on equity transfer with the competent tax authorities, the information to be submitted includes: if asset evaluation is required according to the regulations, an evaluation report on the value of net assets or assets such as land and real estate issued by an intermediary institution with statutory qualifications.
Article 14 stipulates that where the proportion of assets such as land use rights, houses, unsold properties of real estate enterprises, intellectual property rights, prospecting rights, mining rights and equity interests of the investee enterprise exceeds 20% of the total assets of the enterprise, the competent tax authorities may approve the income from the transfer of equity interests by reference to the asset evaluation report issued by an intermediary institution with statutory qualifications provided by the taxpayer.
As can be seen, when an individual makes a transfer of equity, he or she needs to have assets such as land, property and intellectual property evaluated and submit an asset evaluation report to the competent tax authorities when filing a tax return. It should be reminded that the asset evaluation report is of great use to the tax authorities in approving income when the income from equity transfer is significantly low.
If you have further questions regarding the process of Equity Transfer, the estimation on the Personal Income Tax or the necessity of Assets Evaluation Audit, please contact us.
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[1] Reference – The Notice:
https://shenzhen.chinatax.gov.cn/sztax/xxgk/tzgg/202106/76520dbeb2094ddea5a57e13a07c4bc8.shtml
