On March 30, 2015, the Ministry of Finance and the State Administration of Taxation issued the Circular on Income Tax Policies Relating to Personal Non-monetary Asset Investments (hereinafter, the "Circular"), the highlights of which are as below.
First, the Circular clearly defines what constitutes "non-monetary assets," which refer to assets other than cash or bank deposits and include equity, real estate, technical invention results and other forms of non-monetary assets. Meanwhile, "non-monetary asset investment" specifically indicated in the Circular refers to the establishment of a new enterprise via non-monetary capital contribution, as well as using non-monetary assets to participate in the capital increase of an enterprise, private placement of stock, equity exchange, and reorganization and restructuring.
In addition, the Circular specifically stipulates that for an individual investing with non-monetary assets, the income from the transfer of non-monetary assets should be determined based on the appraised fair value, and the taxable income is the balance obtained by subtracting the original value and reasonable tax expenses of such assets from the transfer income. In addition, an income from the transfer of non-monetary assets should be realized at the time when the non-monetary assets are transferred and the stock of an invested company is obtained.
Further, the cash portion of a cash premium obtained by an individual in the course of non-monetary asset investment should be used to pay taxes first, and the shortfall of the cash for tax payment may be paid in installments. Cash income obtained from the transfer of the entirety or part of the above-mentioned stocks during the installment tax payment period should also be used to pay the outstanding taxes first.
Finally, the installment tax payment policy under the Circular came into effect on April 1, 2015. The taxes shall be filed prior to the 15th of the following month in which the taxable activity occurred. For personal non-monetary asset investment prior to April 1, 2015, if the tax treatment is not yet conducted and less than five years have elapsed since the above taxable activity occurred, the remaining taxes may be paid by installment during the remaining period.