There are multiple companies under Mr. Zhang's name, and the company's shares are mainly held by Mr. Zhang and his employees. Each company operates in parallel and has no controlling relationship. After years of operation, each company has achieved good performance. In 2019, in order to coordinate and manage various companies, integrate their resources, and create a unified brand, Boss Zhang decided to integrate the companies under his name. The integration plan is to use Company A under Mr. Zhang's name as a shareholding platform to control other companies. The integration method mainly involves transferring the equity of each company to Company A, in order to achieve the goal of controlling Company A, and the equity transfer price adopts the method of "fair price transfer". The transferors of the equity are all Mr. Zhang and his subordinates (hereinafter referred to as the "Equity Transferor"), and the equity transfer payment has not been actually paid.

The above-mentioned equity transfer has been registered with the industrial and commercial department for changes. Shortly after the change of industrial and commercial registration, each equity transferor received a notice from the tax department requiring all parties to declare and pay Personal income tax on the transferred equity, amounting to more than 4 million yuan in total. After receiving the notice, Boss Zhang exclaimed unexpectedly that if he had known that such a huge amount of taxes needed to be paid, he would not have considered integrating the company under his name. So Boss Zhang communicated with the tax department and asked if it was possible to restore the changed equity to the original shareholders without paying taxes. The tax department stated that changing back to the original shareholder after the equity transfer constitutes a re transfer of the equity and does not exempt the tax liability for the first equity transfer.

Personal equity transaction has long been a difficulty in Personal income tax collection and management. In the past, due to limited regulatory measures and the reality of data fragmentation between departments, tax revenue loss was relatively serious. Many bosses are therefore indifferent to the tax liability of equity transfer, thinking that as long as the fair value transfer is not required to pay Personal income tax. So we will see that in this case, Mr. Zhang casually adopted equity transfer for company integration, without expecting any tax obligations, let alone conducting tax planning in advance.

For a long time, personal equity transaction is not only the difficulty of Personal income tax collection and management, but also the focus of collection and management. In order to further strengthen the collection and management, the Announcement of the State Taxation Administration on the Issuance of the Administrative Measures for Personal income Tax on Equity Transfer Income (Trial) (State Taxation Administration 2014 No. 67) was issued in 2014, making specific provisions on Personal income tax on equity transfer income. According to the announcement, when an individual transfers his/her equity, the balance of the income from equity transfer minus the original value of the equity and reasonable expenses shall be the taxable income, and the Personal income tax shall be paid according to the "income from property transfer" at the rate of 20%. At the same time, according to the provisions of the Measures for the Administration of Personal income Tax, tax authorities at all levels should actively create conditions to issue tax payment certificates (certificates) for taxpayers, print the Tax Payment Certificate of Personal income Tax of the China through the basic information management system, and provide tax payment basis for taxpayers. Local industrial and commercial departments also have regulations requiring the transferor to submit a personal income tax payment certificate.

Subsequently, various regions have introduced policies requiring natural person shareholders to declare taxes before making changes to the industrial and commercial registration of equity transfers, known as "tax before transfer". On November 28, 2022, the State Taxation Administration Shanghai Municipal Taxation Bureau The Shanghai Municipal Market Supervision Administration jointly issued the Circular on Further Improving the Inspection Service of Personal income Tax Payment Certificates for Equity Change Registration (Circular No. 3 in 2022) "If an individual transfers his or her equity to handle the shareholder change registration, before going through the change registration with the market supervision and administration department, the withholding agent and taxpayer shall, in accordance with the law, handle the tax declaration with the local competent tax authority where the invested enterprise is located. The State Taxation Administration Shanghai Municipal Taxation Bureau and the Shanghai Municipal Market Supervision and Administration Bureau implement an automatic exchange mechanism for information on individual equity transfer. The market subject registration authority shall, according to the To handle the registration of equity changes in the "Tax Payment Status Form for Changes in Equity of Natural Person Shareholders" This case occurred in 2019 in Shanghai. At that time, Shanghai had not yet clearly defined the rule of "tax before transfer", which would result in a situation where tax declaration was required only after the equity change occurred.

In 2021, the Inspection Bureau of the State Administration of Taxation released the "Opinions of the State Administration of Taxation on Further Deepening the Reform of Tax Collection and Management" on its official website, and even listed "equity transfer of high-income groups" as one of the eight key inspection industries or fields of the year. This is also the case that the transfer of natural person's equity is required to pay a huge amount of Personal income tax in recent years. This case is against this background. The author has dealt with multiple similar cases in recent years, and there have also been similar cases occurring recently, which is the motivation for the author to write this article.

 According to the tax law, when an individual transfers his or her equity, the balance of the income from equity transfer minus the original value of the equity and reasonable expenses shall be the taxable income, and the Personal income tax shall be paid according to the "income from property transfer". In practice, many people believe that when equity is transferred at an equal price, and the balance of the transfer price minus the original value of equity is zero, there is no taxable income and Personal income tax is not required. This understanding is incorrect. If the operation is so simple, taxes can be exempted. As long as both parties cooperate in the equity transfer and transfer at a fair price, wouldn't the tax bureau never receive taxes? In this regard, the Announcement of the State Taxation Administration on the Issuance of the Measures for the Administration of Personal income Tax on Equity Transfer Income (for Trial Implementation) (No. 67 Announcement of the State Administration of Taxation in 2014, hereinafter referred to as "No. 67 Document") stipulates that equity transfer income shall be determined in accordance with the principle of fair trade. If the declared equity transfer income is lower than the corresponding net asset share of the equity, it is considered that the transfer income is significantly lower. For those whose declared equity transfer income is significantly low and without justifiable reasons, the competent tax authority can verify the equity transfer income. Specifically, in this case, the tax bureau believed that the "fair value transfer" violated the principle of fair trade without proper reasons, so the verification of equity transfer income would generate more than 4000000 yuan of Personal income tax.

Lawyer Plan

  In this case, Boss Zhang clearly regretted the series of equity transfers and proposed to the tax bureau to restore the changed equity to the original shareholders in order to relieve his tax obligations. According to the provisions of the Official Reply of the State Taxation Administration on Personal income Tax Collection for Taxpayers' Withdrawal of Transferred Equity (GSH [2005] No. 130, hereinafter referred to as "130 Document"), "If the equity transfer contract has been fulfilled, the equity has been registered for change, and the income has been realized, the income from equity transfer obtained by the transferor shall pay Personal income tax in accordance with the law. After the end of the transfer, the parties signed and executed an agreement to cancel the original equity transfer contract and return the equity, which is another equity transfer, and Personal income tax levied on the previous transfer will not be returned." According to the above provisions, Obviously, it cannot solve Boss Zhang's problem.

How can we solve Boss Zhang's problem? The answer is still in 130 articles. The article further stipulates that, "If the equity transfer contract has not been fully performed, and the original equity transfer contract has been stopped due to the execution of the arbitration commission's ruling on the termination of the equity transfer contract and the supplementary agreement, and the transferred equity has been recovered at the original price, because the equity transfer has not been completed and the income has not been fully realized, with the termination of the equity transfer relationship, the equity income no longer exists. According to the relevant provisions of the Personal income Tax Law and the Tax Collection and Management Law, and from the administrative act Based on the principle of rationality, taxpayers should not pay Personal income tax. " According to this regulation, if the equity transfer contract is not fully fulfilled, or if the equity transfer contract is terminated by a court or arbitration institution, and the original price of the equity is reversed, due to the incomplete transfer behavior, the income is not fully realized. With the termination of the transfer relationship, the transfer proceeds no longer exist, so taxpayers do not need to pay taxes, and the paid taxes should be refunded.

You may have noticed that some of the equity transfers in this case have not paid the equity transfer fee, which means that it meets the above requirement of "the equity transfer contract has not been fully fulfilled". As long as both parties to the equity transfer obtain the ruling and judgment of the judicial authority to terminate the equity transfer contract according to law, they can not pay Personal income tax. The author also used this clause to successfully handle multiple similar cases, helping the parties avoid huge tax obligations.

Regulatory search

 1、 Announcement of the State Taxation Administration on Issuing the Administrative Measures for Personal income Tax on Equity Transfer Income (for Trial Implementation) (No. 67 Announcement of the State Administration of Taxation in 2014)

Article 12: If one of the following circumstances is met, it shall be deemed that the income from equity transfer is significantly low:

（1） The declared equity transfer income is lower than the corresponding net asset share of the equity. Among them, if the invested enterprise owns land use rights, houses, unsold properties, intellectual property rights, exploration rights, mining rights, equity and other assets of the real estate enterprise, and the declared equity transfer income is lower than the fair value share of the corresponding net assets of the equity;

（2） The declared equity transfer income is lower than the initial investment cost or the price paid for acquiring the equity and related taxes;

（3） The declared income from equity transfer is lower than the income from equity transfer to the same shareholder or other shareholders of the same enterprise under the same or similar conditions;

（4） The declared equity transfer income is lower than the equity transfer income of enterprises in the same industry under the same or similar conditions;

（5） Unreasonable free transfer of equity or shares;

（6） Other situations recognized by the competent tax authority.

Article 13: If the income from equity transfer that meets one of the following conditions is significantly low, it shall be deemed as having legitimate reasons:

（1） Can provide valid documents to prove that the invested enterprise has been significantly affected in production and operation due to national policy adjustments, resulting in the transfer of equity at a low price;

（2） Inherit or transfer the equity to his/her spouse, parents, children, grandparents, grandchildren, grandchildren, brothers and sisters who can provide legal proof of identity relationship, as well as the caregivers or supporters who bear the obligation to directly support or support the transferor;

（3） The internal transfer of equity held by employees of our company that cannot be transferred to external parties, as stipulated by relevant laws, government documents, or corporate articles of association, and with sufficient evidence to prove the reasonable and true transfer price;

（4） Other reasonable circumstances where both parties to the equity transfer can provide valid evidence to prove its rationality. 2、 Official Reply of the State Taxation Administration on Personal income Tax Collection of Taxpayers' Withdrawal of Transferred Equity (GSH [2005] No. 130)

Sichuan Provincial Local Taxation Bureau:

 We have received your Request for Instructions on Whether Taxpayers Should Refund Paid Personal income Tax for Recovering Transferred Equity (CDSF [2004] No. 126).After research, we hereby approve as follows:

 1、 In accordance with the Personal income Tax Law of the China (hereinafter referred to as the Personal income Tax Law) and its implementation regulations, as well as the relevant provisions of the Law of the Taxation in China on the Administration of Tax Collection (hereinafter referred to as the Tax Collection Law), if the equity transfer contract has been fulfilled, the equity has been changed and registered, and the income has been realized, the income from equity transfer obtained by the transferor shall pay Personal income tax according to law. After the end of the transfer, both parties signed and executed the agreement to cancel the original equity transfer contract and return the equity, which is another equity transfer, and the Personal income tax collected on the previous transfer will not be returned.

 2、 If the equity transfer contract has not been fully performed, and the original equity transfer contract has been suspended due to the execution of the arbitration commission's ruling on the termination of the equity transfer contract and the supplementary agreement, and the transferred equity has been recovered at the original price, the equity gains will no longer exist with the termination of the equity transfer relationship because the equity transfer has not been completed and the income has not been fully realized. According to the relevant provisions of the Personal income Tax Law and the Tax Collection and Management Law, And starting from the principle of rationality of administrative acts, taxpayers should not pay Personal income tax.

CC: Local tax bureaus of various provinces, autonomous regions, municipalities directly under the central government, and cities specifically designated in the state plan.

State Taxation Administration

January 28, 2005