Equity Transfer and Tax Planning

Equity transfer is a property rights changes behavior, in our country it can only create rights as required by law and it has to register the transfer for legal effect.   In Market Economy, share transfer to the transferee is at the general direction of transferor's right to receive a certain price, or to gain specific benefits.    Equity transfer agreement to be entered into in an equity transfer, the agreement specifies the transferor and the transferee the rights and obligations; transfer price is on taxable basis.

According to China tax law:    Equity transfer is required to pay stamp duty and tax.    The purchaser is required to pay stamp duty.

1.  Stamp:-

(1)  Transfer of shares of listed company, securities transactions are required to take part in institutions, the transferor shall be in accordance with the trading volume of one-thousandth  tax rate;
(2)   For non-listed company, under the equity transfer agreement, it is according to the transfer price to pay stamp duty at a rate of transfer contained in the Equity Transfer Agreement. The rate is five-ten thousands.   During the share transfer process, in case of due to non-tradable shareholders to tradable shareholders, for paying the price occurred, the equity transfer are temporarily exempted from stamp duty.

2.   Income Tax:-

(A)   The transfer of ownership of individual shareholders should follow the personal income tax law on transfer of ownership of income taxes.
Taxable income:-    Equity Transfer are deducted from income property cost and a reasonable balance of costs.   Among them, the property of the original right of the transferor to obtain the value of the stock to pay costs;  reasonable costs mean the transfer of equity to be paid according to the law that relats to fees purposes.   Individual transfer of ownership are taxable under personal income tax. The rate is 20%.

(B)   For corporate shareholder transfer, in accordance with the EIT Law and its implementing regulations on income tax, taxable income amount:- business transfer of ownership, deduct the net [Note 1] part.    For listed company shares transfer, it is in accordance with the securities trading volume to the total transfer of ownership of revenue;  for non-share transfer form, the equity transfer income of corporate shareholder is determined in accordance with the equity transfer agreement.   Non-resident enterprises [Note 2] in China has no establishment, place, or has set up institutions and places that has income obtained by the institutions, they may have no actual connection, the transfer of ownership should be at the rate of income tax of 20%, for the others, 25% on the taxes applicable to the enterprises rate.

3.   Equity transfer involves special provisions:-

(1)   Personal equity transfer income obtained in breach of contract should be included in taxable income, it is himself to report to the relevant tax authorities for payment.
(2)   If the transfer of ownership is withdrewn by the transferor and the registered shareholding has changed, the action of transfer have been satisfied, it has to pay according to the law for the tax paid; for those who has not terminate the registration, the transferor cannot obtain benefits and it should not subject to income tax.

[Note 1]  Net value refers to the underlying assets, the property that has been in accordance with the provisions, net of depreciation, depletion, amortization, provisions and other post-balance.
[Note 2]  Non-resident enterprises are those registered under foreign (regional) legal for establishments but its effective management is not in China.   In the Chinese territory, it has establishment or place, or has no establishment or places in China but its incomes are came from China territory.

Further reading:   If a company needs to transfer, it can be in form of transfer of assets (including the transfer of intangible assets and real estate transfer) and the share transfer in two ways.

In accordance with the relevant provisions of tax law:-

  1. Transfer of intangible assets is required to pay sales tax and urban maintenance and construction tax levy, education, local education surcharge, India flowers and income taxes, the purchaser need to pay stamp duty.
  2. Real estate transfer is required to pay sales tax and its accompanying levy urban maintenance and construction tax, education, local education surcharge, soil to VAT (value-added based on availability), stamp duty and tax, buyers need to pay stamp duty and deed tax (tax rate 3%).
  3. Equity transfer does not collect sales tax and surtaxes. It is mainly charged for stamp duty and income tax. Buyers only need to pay stamp duty.