The transfer or transfer of equity within an enterprise usually has the characteristics of not changing the way of using assets and not changing the ultimate controller of resources, which can maintain the stability of business activities and rights and interests, optimize the capital structure, and save resource costs, which is increasingly favored by enterprises. For example, on January 26, 2024, Feida Environmental Protection issued an announcement saying that the company's controlling shareholder, Hangzhou Iron and Steel Group, decided to hold 29.3 billion shares of Feida Environmental Protection Equity were transferred to its wholly-owned subsidiary, Zhejiang Environmental Protection Group, free of charge. In particular, if some enterprises choose special tax treatment when transferring equity free of charge, they must pay attention to the confirmation method of tax basis.
Typical cases
Company A is a large-scale food and beverage packaging material manufacturer, with customers covering many well-known domestic brands, and is a 100% owned subsidiary of Company B. In 2015, Company B transferred all the equity of its 100%-owned subsidiary, Company C, to Company A, and Company A held 100% of the equity of Company C after the transfer was completed. The tax basis of Company B's long-term equity investment in Company C is 576660,000 yuan. In 2015, when the equity transfer was carried out, the transferor and the transferor chose special tax treatment, and neither the transferor nor the transferor recognized the gains or losses.
After the completion of the transfer, Company A recognized the initial investment cost of the long-term equity investment of 13,137 according to the total owner's equity of Company C at the time of the transfer040,000 yuan. In May 2020, Company C converted its surplus reserve into a capital of 2285850,000 yuan. In 2021, Company C was deregistered. When Company C was deregistered, Company A recovered a total investment of 74.5 million yuan, so when the enterprise income tax was settled in 2021, Company A recognized an investment loss of 13,13704-7450=5687.040,000 yuan.
Risk analysis
According to the Notice of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Treatment of Enterprise Income Tax Related to Promoting Enterprise Restructuring (CS 2014 No. 109) and the Announcement of the State Administration of Taxation on Issues Concerning the Collection and Administration of Enterprise Income Tax on the Transfer of Assets (Equity) (Announcement No. 40 [2015] of the State Administration of Taxation), the transfer of equity or assets between resident enterprises under 100% direct control, as well as between resident enterprises directly controlled by 100% of the same or multiple resident enterprises, according to the net book value. Where there is a reasonable commercial purpose, the main purpose is not to reduce, exempt or postpone the payment of taxes, the original substantive business activities of the transferred equity or assets are not changed within 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, it may choose not to recognize the income according to the transferor and the transferee enterprise; The tax basis of the transferred equity or assets obtained by the transferee enterprise shall be determined by the original net book value of the transferred equity or assets; The transferred assets obtained by the transferee enterprise shall be deducted from depreciation according to its original net book value for special tax treatment. The tax basis of the transferred equity or assets obtained by the transferee enterprise shall be determined by the original net book value of the transferred equity or assets, which means that the tax basis of the transferred equity or assets obtained by the transferee enterprise shall be determined by the original tax basis of the transferred equity or assets. Therefore, the special tax treatment must meet certain preconditions, otherwise it will be determined that the special tax treatment cannot be applied from the beginning. In this case, if Company A wants to choose the special tax treatment, it must also meet the preconditions for the special tax treatment. On this basis, the tax basis of the long-term equity investment of Company A obtained by Company C shall be determined by the tax basis of the long-term equity investment of Company B of Company C, i.e., 576660,000 yuan.
In practice, the conversion of retained earnings (surplus reserves, undistributed profits) into registered capital or share capital will normally be regarded as the distribution of profits before the capital increase, and the shareholders of resident enterprises are exempt from corporate income tax, and the tax basis of long-term equity investment is increased. Based on this, the author believes that the tax basis for the long-term equity investment in Company C obtained by Company A should be the tax basis of the long-term equity investment in Company C by the original Company B 576660,000 yuan plus 2,285 of the surplus reserve converted into capital850,000 yuan, and the investment cost after the increase is 57666+2285.85=8052.45 (10,000 yuan). Therefore, when Company A deregisters Company C in 2021, it should recognize an investment loss of 805245-7450=602.45 (10,000 yuan).
Practical reminders
In practice, enterprises that choose special tax treatment for free transfer of equity should attach great importance to and prudently handle this type of business, especially to strengthen the study and grasp of tax policies, and accurately carry out tax treatment in accordance with the relevant provisions of the tax law in combination with the specific process of business occurrence. At the same time, communication with the tax authorities should be strengthened to avoid tax-related risks.
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This article**: China Tax News, Author: Li Houwu Yang Xinying, Author's Affiliation: The First Taxation Branch of Chuzhou Taxation Bureau of the State Administration of Taxation, pay attention to [Ming Tax] Subscribe to more content.