Tax Planning forSmall and Medium Sized Enterprises in China

Recent Tax Changes Concerning Equity Transfers

What is an Equity Transfer?

Scenario One• A non-China resident company (“seller”) sell part/all of its

shares of a Chinese company to another non-China resident company or a domestic company.

Scenario Two• A non-China resident company sell part/all shares of its

subsidiary (“intermediary Co.”) which owns part/all shares of a Chinese company.

Tax Changes ConcerningEquity Transfers

Major Changes Under Scenario One:• If a capital gain incurred, relevant withholding tax is

required;• Capital Gain = Selling price – Purchased cost• Retained earnings will not be excluded from the equity

transfer price;• Cost = Amount of initial contribution / consideration • The foreign currency of the initial contribution and the

exchange rate at the date of subsequent investment should be used.

Tax Changes ConcerningEquity Transfers

Example: Changes Under Scenario One• A foreign company would like to sell 100% of its Chinese

subsidiary at the price of USD 100, which includes the Chinese subsidiary’s retained earnings of USD 40. The initial contribution is USD 30.

Withholding Tax = (USD100-USD30)* 10% = USD 7

• A foreign company would like to sell 100% of its Chinese subsidiary at the price of USD 60 and decided to distribute its Chinese subsidiary’s retained earning USD 40 before the transfer. The initial contribution is USD 30.

Withholding tax = (USD60-USD30)* 10% = USD3

Tax Changes ConcerningEquity Transfers

Major Changes Under Scenario Two:• Relevant supporting documents need to be reported to

tax bureau if:– The seller has the real control power– The tax rate in the jurisdiction of intermediary Co. is

less than 12.5% or tax exempted

• Tax authorities may disregard the existence of a intermediary company if the purpose of this company was for tax avoidance. Therefore, the sale of the company will be subject to Chinese tax.

Tax Changes ConcerningEquity Transfers

Other Major Points:• Regulation takes effect retroactively January 1st 2008;• Regulation does not apply to share sales on the stock

market;• Chinese companies have an obligation to withhold tax. If

the Chinese company cannot fulfill this obligation, the seller should file a tax return within 7 days after the share transfer or consideration has been paid in scenario one;

• In scenario two, relevant documents need to be reported to the tax authorities within 30 days after the transfer agreement has been signed.

Issues for Clarification

The following issues require further clarification from tax authorities:

• How will the new regulation be implemented? Especially in scenario two?

• How do we determine that the shares have been transferred in scenario one? Obtain the approval letter or obtain the revised business license?

• How do we determine the tax rate / tax exemption in the jurisdiction of the intermediary company?

Contact Us

NCO China

• tel:  +86 (10) 8447 8118• fax: +86 (10) 8447 9349• e-mail:  enquiry@ncochina.com• website: www.ncochina.com