On December 7, 2014, SAT released the Administrative Measures for Individual Income Tax on Capital Gains from Equity Transfer (“the Measures”), which will be in force on January 1, 2015. The Measures will replace tax circular Guo Shui Han [2009] No. 285 and SAT Announcement [2010] No. 27, which formerly regulated this matter, and will provide more comprehensive and clearer guidelines.

The Measures’ main highlights are as follows:

1. Applicable scope

The Measures apply to the transfer of equity or shares that individuals invest in entities (other than proprietorship enterprises and partnerships) established in China, excluding the transfer of shares listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange, restricted shares and equity under special provisions.

The Measures specify seven categories of equity transfer activities:

  • sales of equity;
  • equity buybacks;
  • at IPO, shareholders of invested companies selling their shares to new investors through public offering;
  • compulsory transfer of equity ownership by judicial or administrative body;
  • transfer of equity for contribution in another entity or for exchange in other non- monetary transactions;
  • repayment of debts with equity;
  • other equity transfer activities.

2. Withholding obligation

In line with the individual income tax (“IIT”) law, the transferor is the taxpayer of IIT on capital gains on equity transfer, and the transferee is the statutory withholding agent.

3. Equity transfer price

The capital gain on an equity transfer is the difference between the equity transfer price and the sum of the acquisition cost, formed by the original value of the transferred equity, and reasonable costs related to the transfer.

Under the Measures, the equity transfer price refers to all considerations resulting from the equity transfer, including cash, in kind, securities, and other economic benefits such as penalties, compensation and conditional remuneration.

The equity transfer price must follow the arm’s length principle. The Measures state the conditions under which the tax authorities can adjust the price and the exceptions to these conditions.

If the tax authorities adjust the price, they must adopt the net assets method, analogy method and other reasonable methods in sequence.

When adopting the net assets method, a reference must be made to the net assets corresponding to the transferred equity. The Measures specify that if assets consisting of land use rights, real estate, IP, exploration rights, mining rights and equity exceed 20% of the total assets of the invested entity, an asset valuation report issued by a qualified agent will be needed.

4. Original value of transferred equity

The Measures state the methods for determining the original value of the equity by reference to the method of the equity acquisition (purchase, exchange, donation and capital increase).

The Measures also specify that if the tax authorities adjust the equity transfer price to calculate the capital gain, the transferee shall consider the adjusted transfer price as tax cost basis to calculate the capital gain or loss it may obtain in a subsequent equity transfer.

In addition, if an individual acquires the equity of the invested entity along several moments, the weighted average method must be used to determine the original value of the equity in partial transfers.

5. Location and timing for tax declaration

The Measures specify that IIT on capital gains derived from an equity transfer must be declared to the invested entity’s tax authority within 15 days following the month in which any of the specific circumstances provided in article 20 of the Measures take place (for instance, the total or partial payment of the price or the legal effectiveness of the transfer agreement, among others).

6. Reporting obligation

In addition to the tax declaration obligation, the withholding agent and the invested entity also have the following reporting obligations:

  • Within 5 days of signing the equity transfer agreement, the withholding agent must report the equity transfer information to its competent tax authority;
  • Within 5 days of the board of directors meeting or shareholders meeting, the invested entity must report the resolution and meeting minutes relating to the equity transfer to its competent tax authority;
  • Within 15 days of the change of individual shareholding, the invested entity must report the change of shareholding to its competent tax authority. In this regard, the Measures provide that tax authorities shall enhance cooperation with admi n- istrations for industry and commerce.

Date of issue: December 7, 2014. Effective date: January 1, 2015.