Unlike cash contributions, there is uncertainty about the value of non-monetary assets at the time of capital contribution, especially when intangible assets are used for capital contribution, and when non-monetary assets are "undervalued" or "undervalued at low value", what are the risks and liabilities under the current company law framework, and what possible tax treatment they face under the tax law.
The author recently handled a consultation on how to identify and deal with the tax involved in non-monetary contributions, which led to the reflection on the legal risks and tax treatment of non-monetary assets under different circumstances of "high value undervaluation" and "low value overvaluation". (This article does not discuss the internal issues of corporate governance in the case of defective capital contributions).
This is the second part, which will continue from a tax perspective and provide practical suggestions.
5. Tax perspective of non-monetary contributions.
Whether in the field of civil and commercial law or tax law, the use of non-monetary property by shareholders to contribute capital to the company is regarded as a consideration act, that is, the shareholder acquires the equity paid by the company as consideration at the cost of paying non-monetary property;On the contrary, the company acquires non-monetary property paid by shareholders in consideration for the payment of its own equity. In this process, the transfer of ownership of non-monetary property is, in principle, a taxable act under the tax law, and the tax shall be calculated and levied in accordance with the relevant provisions of the applicable tax to determine the tax treatment of the corresponding tax, unless there are exceptions in the tax law.
However, the tax law uses the "independent entity law", i.e., the "arm's length principle", as the basis for determining the tax treatment of taxable acts. Therefore, the phenomenon of "high value undervaluation" and "low value overvaluation" of non-monetary property contributions will face different tax treatment under the scope of "independent entity law" of the tax law.
6. "High value and undervaluation" tax treatment of non-monetary property contributions.
a) Value Added Tax.
Value-added tax is levied on the taxpayer's transfer of tangible movable property, tax collection services, transfer of intangible assets or sales of immovable property for compensation. According to Paragraph 3 of Article 3 of the Detailed Rules for the Implementation of the Provisional Regulations on Value-Added Tax (hereinafter referred to as the "Implementation Rules") and Article 11 of Annex 1 of the Notice of the Ministry of Finance and the State Administration of Taxation on Comprehensively Launching the Pilot Program of Replacing Business Tax with Value-Added Tax (Cai Shui 2016 No. 36) and the Implementation Measures for the Pilot Program of Replacing Business Tax with Value-Added Tax (hereinafter referred to as the "Pilot Measures"), "paid" here refers to "obtaining money, goods or other economic benefits". Therefore, the equity of the invested company obtained by the shareholder when using non-monetary property to contribute capital to the investee company is "other economic interests", therefore, the shareholder's use of non-monetary property to make capital contribution is subject to VAT and should be subject to VAT.
1.VAT levy provisions.
In view of the phenomenon of "high value and undervaluation" of non-monetary property contributions, Article 16 of the Detailed Implementation Rules and Article 44 of the Pilot Measures both give the in-charge tax authorities the right to re-assess the sales amount, that is, the in-charge tax authorities have the right to determine the sales amount in the following order:
1) It shall be determined according to the average ** of the taxpayer's sales of similar goods, similar services, intangible assets or immovable property in the most recent period;
2) It shall be determined according to the average ** of the sales of similar goods, similar services, intangible assets or immovable property of other taxpayers in the most recent period;
3) Determined according to the composition of the tax**.
2.VAT is not taxed provisions.
If the non-monetary property used by the shareholder to contribute capital constitutes one or more "businesses", it can enjoy the tax treatment of not being subject to VAT. "Business" here refers to the combination of certain production and operation activities or assets within the enterprise, which generally has input, processing process and output capabilities, and can independently calculate its costs or revenues.
According to the Announcement of the State Administration of Taxation on VAT Issues Relating to the Asset Restructuring of Taxpayers (Announcement No. 13 of 2011 of the State Administration of Taxation), the Announcement of the State Administration of Taxation on VAT Issues Relating to the Asset Restructuring of Taxpayers (Announcement No. 66 [2013] of the State Administration of Taxation) and Annex 2 of the Notice of the Ministry of Finance and the State Administration of Taxation on Comprehensively Promoting the Pilot Program of Replacing Business Tax with Value-Added Tax (CS 2016 No. 36) Article 1, Paragraph 1, Item 2 stipulates that in the process of asset reorganization, all or part of the physical assets and the related creditor's rights, liabilities and labor are transferred to other units and individuals through merger, division, replacement, etc., and the transfer of goods, real estate and land use rights involved does not fall within the scope of VAT and is not subject to VAT.
From the above provisions, it can be seen that when goods, immovable property, land use rights, and related creditor's rights, debts and labor together constitute a "business", and when they are transferred together, VAT will be given non-taxable tax treatment.
2) Land Appreciation Tax.
LAT is levied on the taxpayer's transfer of state-owned land use rights, buildings on the ground and their attachments for compensation. According to Article 5 of the Provisional Regulations on Land Appreciation Tax, "paid" here refers to "monetary income, income in kind and other income". Therefore, the equity of the invested company obtained by shareholders when they use non-monetary assets to make capital contributions to the invested company is "other income", and therefore, the use of non-monetary assets by shareholders to make capital contributions is subject to LAT and should be subject to LAT taxation.
1.Provisions on the taxation of Land Appreciation Tax.
In view of the phenomenon of "high value and undervaluation" of non-monetary property contributions, Article 9 of the Provisional Regulations on Land Appreciation Tax stipulates that if the transaction of transferred real estate is lower than that of real estate appraisal**, and there is no justifiable reason, LAT shall be calculated and levied according to the real estate appraisal**.
2.Provisions on the temporary non-taxation of land appreciation tax.
If a shareholder makes a capital contribution with non-monetary property such as housing, according to Article 4 of the Announcement of the Ministry of Finance and the State Administration of Taxation on Continuing to Implement the Land Appreciation Tax Policies Related to the Restructuring and Reorganization of Enterprises (Announcement No. 51 [2023] of the Ministry of Finance and the State Administration of Taxation), if an entity or individual invests in real estate at the price of real estate during the restructuring and reorganization, the transfer or change of real estate to the invested enterprise shall not be subject to LAT for the time being. Since there is no restrictive provision on whether the valuation is fair, shareholders will enjoy the tax treatment of temporarily exempting LAT when they make capital contributions in the form of "high value undervaluation" or "low value overvaluation" when they value non-monetary property such as houses.
3) Deed tax. The deed tax is levied on the taxpayer's transfer of land and house ownership. Therefore, the shareholder's use of non-monetary property to contribute capital to the invested company is an act of transferring the ownership of land and housing, and is the subject of deed tax, and should be subject to deed tax.
For the transfer of land and house ownership for compensation, the deed tax shall be calculated on the basis of the transaction ** or the swap price difference;If the deed tax is lower than the free transfer of land and house ownership, the deed tax is based on the market.
1.Deed tax levy provisions.
In view of the phenomenon of "high value and undervaluation" of non-monetary property contributions, paragraph 2 of Article 4 of the Deed Tax Law stipulates that if the difference between the transaction ** and swap** declared by the taxpayer is obviously low and there is no justifiable reason, the tax authorities shall verify and verify it in accordance with the provisions of the Law of the People's Republic of China on the Administration of Tax Collection.
2.Deed tax exemption provisions.
If a shareholder makes a capital contribution to non-monetary property such as housing by way of transfer, according to paragraph 2 of Article 6 of the Announcement of the Ministry of Finance and the State Administration of Taxation on Continuing to Implement the Deed Tax Policies Related to the Restructuring and Reorganization of Enterprises and Institutions (Announcement No. 49 of 2023 of the Ministry of Finance and the State Administration of Taxation), "the transfer of land and housing ownership between enterprises within the same investment entity includes between the parent company and its wholly-owned subsidiaries, between the wholly-owned subsidiaries of the same company, and between the sole proprietorship enterprises established by the same natural person and one person*** and paragraph 3 "the parent company shall be deemed to have transferred the capital of its wholly-owned subsidiary with the ownership of land and houses and shall be exempted from deed tax".
4) Individual income tax.
Individual income tax is levied on the taxable income obtained by the taxpayer. According to Article 8 of the Regulations for the Implementation of the Individual Income Tax Law, the form of personal income includes cash, in-kind, valuable** and other forms of economic benefits. Therefore, the equity of the invested company obtained by shareholders when they use non-monetary assets to make capital contributions to the invested company is "other forms of economic interests", so the use of non-monetary assets by shareholders to make capital contributions is subject to individual income tax and should be subject to individual income tax.
1.Provisions for the taxation of personal income tax.
In view of the phenomenon of "high value and undervaluation" of non-monetary property contributions, Article 8, Paragraph 1, Item 1 of the Individual Income Tax Law stipulates that if the business transactions between an individual and its related parties do not comply with the arm's length principle and reduce the tax payable by himself or his related parties, and there is no justifiable reason, the tax authorities have the right to make tax adjustments in accordance with reasonable methodsArticle 8 of the Regulations for the Implementation of the Individual Income Tax Law stipulates that if the income is other forms of economic benefits, the taxable income shall be assessed with reference to the market.
5) Enterprise income tax.
Enterprise income tax is levied on the taxable income obtained by taxpayers. According to Article 6 of the Enterprise Income Tax Law, the forms of income of enterprises include monetary and non-monetary forms. Therefore, the equity of the invested company acquired by the shareholder when using non-monetary property to make capital contribution to the invested company is a "non-monetary form", so the shareholder's use of non-monetary property to make capital contribution is subject to enterprise income tax and should be subject to enterprise income tax.
1.Corporate income tax levy regulations.
Article 111 of the Regulations for the Implementation of the Enterprise Income Tax Law stipulates that if the business dealings between an enterprise and its related parties do not conform to the arm's length principle and reduce the taxable income or income of the enterprise or its related parties, the tax authorities have the right to adjust it in accordance with reasonable methods, and Article 111 of the Regulations for the Implementation of the Enterprise Income Tax Law stipulates that reasonable methods include the comparable uncontrolled method, the resale method, the cost-plus method, the transaction net profit method, Profit splits and other arm's length methods.
2.Corporate income tax exemption provisions.
If the shareholder contributes non-monetary property by way of transfer, and the invested enterprise is a wholly-owned subsidiary, it can enjoy the tax treatment of exemption from enterprise income tax.
According to Article 3 of the Notice of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Treatment of Enterprise Income Tax on Promoting Enterprise Restructuring (CS 2014 No. 109), the transfer of equity or assets between resident enterprises under 100% direct control, as well as between resident enterprises under 100% direct control of the same or the same number of resident enterprises, according to the net book value, if there is a reasonable commercial purpose, no reduction, If the main purpose is to exempt or postpone the payment of taxes, and the original substantive business activities of the transferred equity or assets are not changed for 12 consecutive months after the transfer of equity or assets, and neither the transferor nor the transferee enterprise has recognized the profit or loss in accounting, neither the transferor nor the transferee enterprise shall recognize the income.
7. "Low value and overvaluation" tax treatment of non-monetary property contributions.
In view of the phenomenon of "undervaluation and overvaluation" of non-monetary property contributions, if the investee company or other shareholders request the shareholders who have contributed capital with non-monetary assets to fully perform their capital contribution obligations in accordance with the law in accordance with Article 13 of Interpretation III of the Company Law, they may face the following two types of tax treatment:
a) Apply for overpaid tax before applying for refund.
Since there is a phenomenon of "low value and overvaluation" of non-monetary assets at the time of capital contribution, after the investee company or other shareholders have confirmed this through legal means, there may be a possibility of overpayment of taxes declared and paid by the previous "low value and overvaluation" of non-monetary assets at the time of capital contribution.
According to Article 51 of the Law on the Administration of Tax Collection, the tax authorities shall refund the tax paid by the taxpayer in excess of the tax payable immediately after discovering itIf the taxpayer discovers the tax within three years from the date of settlement and payment, it may request the tax authorities to refund the overpaid tax and add interest on bank deposits for the same period, and the tax authorities shall refund it immediately after timely verification.
Therefore, shareholders who have contributed capital with "undervalued and overvalued" non-monetary assets may apply to the in-charge tax authorities for a refund of the overpaid tax in accordance with the relevant legal judgments.
2) Underpayment of taxes before making up the payment.
If a shareholder who contributes capital with "low value and overvaluation" of non-monetary property is still required to fulfill the obligation to make up the capital contribution with non-monetary property (or cash, depending on the provisions of the articles of association) in accordance with the provisions of the articles of association, he or she shall still be subject to the corresponding tax as mentioned above, which will not be repeated here.
8. Comments and Suggestions.
1) Legal perspective.
From a legal point of view, for the contribution of non-monetary property, attention should be paid to risks and liabilities should be avoided from several aspects: first, attention should be paid to the limitation of the form of capital contribution, second, the property should be free of rights defects, and no other encumbrances should be set, and third, the necessary assessment should be performed. The capital verification procedure, according to the market fair value of the subscription of capital contributions, the fourth is to go through the ownership transfer procedures, need to go through the change registration procedures, handle it in a timely manner, if there is no registration or do not need to go through the change of registration, timely delivery of technical information or delivery, to avoid due to depreciation or invalidation, caused by defective capital contribution liability.
Specific to the perspective of different subjects, 1For the company, the shareholders who contributed capital are required to provide legal proof of rights, appraisal reports, and perform reasonable duty of care. If it is found that there is a deviation (high or low) between the subscribed amount and the actual value of the property, the shareholder who contributed capital is required to make up the capital contribution (when it is low), or it is confirmed with the shareholder who contributed capital twice (if it is high). 2.For other shareholders, because they may have to bear joint and several liability for the difference (to the company's creditors), it should be made clear in the articles of association that when there is a "low value and overvaluation" resulting in the occurrence of "liability for the difference in capital contribution", the shareholder who has contributed capital with non-monetary property shall not hesitate to make up the difference in capital contribution, and if it replaces other shareholders to bear joint and several liability in accordance with the mandatory provisions of the law, it has the right to require the shareholder to bear the liability for breach of contract and pay liquidated damages. 3.For the creditors of the company, they can exercise the right of defense to require the shareholders of the company to bear the guarantee liability for the debts of the company, especially in the case of non-monetary property contributions, they may require that during the period of repayment of creditor's rights, if the non-monetary property depreciates due to market changes, the shareholder shall make up for it in currency, and other shareholders shall bear supplementary liabilities for this, so as to exclude the provisions of Article 15 of Interpretation III of the Company Law.
2) Tax perspective.
From a tax point of view, tax risks should be prevented from the following two aspects for non-monetary property contributions: First, the fairness of the amount of capital contribution should be strictly controlled, especially when the investor and the recipient constitute related parties under the tax law;The second is to pay attention to the provisions of the Tax Collection and Administration Law on the time limit for tax payment and refund, and if the investor and the investor become related parties under the tax law, they should also pay attention to the time limit for tax payment for special tax adjustments.
Specifically, for taxable capital contributions, 1The funder and the investee shall entrust a qualified appraisal agency to conduct an appraisal of the non-monetary property, and require the appraisal agency to explain the reasonableness of the key assumptions and key parameters used in the appraisal process, and retain the necessary appraisal documents for use in case of questioning by the tax authorities2.If it is later discovered that there is a "low value and overvaluation" in the non-monetary property contribution, the tax adjustment and tax payment should be made within the statutory tax payment period stipulated in the Tax Collection and Administration Law, and efforts should be made to avoid being identified as "tax evasion" by the in-charge tax authorities as "low value and overvaluation" of non-monetary property contribution.
For non-taxable or tax-exempt capital contributions, the investor and the recipient shall strictly review whether the capital contribution meets the non-taxable or tax-exempt requirements stipulated in the tax law, and retain sufficient relevant information for use by the tax authorities when questioning.
Special thanks to Duan Chao, Guangzhou Nansha District Taxation Bureau, State Administration of Taxation, for his contribution to this article.
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