Reading guideIn the investor's foreign investment, the investment in monetary property is a non-taxable event and will not incur any tax burden, and the tax problem is limited to the investor's foreign investment in non-monetary assets, which may involve various tax burdens, including enterprise (individual) income tax, value-added tax, land value-added tax, deed tax and stamp duty.
February** Dynamic Incentive Program
1. Income tax on investments in non-monetary assets
(1) The evolution of income tax policy for investment in non-monetary assets
1.Evolution of corporate income tax policy on investments in non-monetary assets
On 31 December 2014, the Ministry of Finance and the State Administration of Taxation issued the Notice of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Enterprise Income Tax Policy for Investment in Non-monetary Assets (Cai Shui [2014] No. 116, hereinafter referred to as "Circular No. 116"), which clarified the long-undefined enterprise income tax policy for investment in non-monetary assets. In fact, the enterprise income tax policy of China's tax law on enterprises investing in non-monetary assets has undergone a relatively complex evolution, mainly including four stages of development. See Table 1-1 below
Table 1-1: Evolution of corporate income tax policies for investment in non-monetary assets.
Note: According to the Decision of the Ministry of Finance on Promulgating the Catalogue of Repealed and Invalid Financial Regulations and Normative Documents (Eleventh Batch) (Decree No. 62 of 2011 of the Ministry of Finance), this document was repealed on February 21, 2011.
According to the announcement of the State Administration of Taxation on publishing the catalogue of tax normative documents that are invalid and annulled in full text (Announcement No. 2 of 2011 of the State Administration of Taxation), this document will become invalid on January 4, 2011.
The controversy is that Article 25 of the Enterprise Income Tax Law only stipulates the exchange of non-monetary assets and not the investment of non-monetary assets, because the invested enterprise does not exist at the time of the new investment, and there is no non-monetary ** exchange.
The evolution of the above policies reflects the changes in the understanding, attitude and position of China's tax law on the enterprise income tax on investment in non-monetary assets
1) Under the Notice of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Income Tax Treatment of the Appraisal and Appreciation of Enterprise Assets (Cai Shui Zi [1997] No. 77, hereinafter referred to as "Circular No. 77"), the Ministry of Finance and the State Administration of Taxation believe that the taxpayer has not received any cash for the net appreciation of the assessed value realized by investing in physical assets and intangible assets, and according to the principle of necessary funds for tax payment (or the principle of tax capacity), the cash will only be received when the asset is transferred or recovered in the middle of the process or at maturity. in order to have the ability to pay taxes and then generate tax liability.
Because, as a result of the taxpayer's investment, the equity of the invested enterprise is collected, which ensures the continuity of investment interests. However, Circular No. 77 does not clarify the income tax treatment of foreign capital contributions by non-monetary assets such as creditor's rights and equity, which is obviously related to the fact that the 1993 Company Law and other laws and regulations do not specify that creditor's rights and equity can be used for capital contribution. At the same time, Circular 77 only provides in a "general" way that the net appreciation of assets arising from the external investment of physical assets and intangible assets shall not be included in the taxable income, and does not attach any applicable requirements (e.g., equity payment ratio and control principle, etc.) to ensure the continuous realization of the principle of necessary funds for tax payment and the rights and interests of investors.
2) Under the Notice of the State Administration of Taxation on Certain Income Taxes on Equity Investment Business of Enterprises (Guo Shui Fa [2000] No. 118, hereinafter referred to as "Circular No. 118"), the position and attitude of the State Administration of Taxation have undergone a huge change. Circular 118 adopts the theory of "transaction decomposition" to deal with the enterprise income tax issue of non-monetary investments, and changes the treatment method of Circular 77 to stipulate that enterprises investing in foreign countries with non-monetary assets should make investments.
When a transaction occurs, it is decomposed into two businesses, namely, the sale of non-monetary assets at fair value and investment, for income tax treatment, and the income or loss from asset transfer is calculated in accordance with the regulations. However, if it is indeed difficult to confirm the payment of enterprise income tax in one tax year, it can be regarded as deferred income and amortized to the taxable income of each year in the current period of the investment transaction and not more than 5 subsequent tax years after the approval of the tax authorities. It can be found that this provision is basically the same as that of the subsequent Circular No. 116;
3) Under the Enterprise Income Tax Law and its implementing regulations, Guo Shui Han [2008] No. 828 (hereinafter referred to as "Circular 828"), one view is that investment in non-monetary assets is regarded as the exchange of non-monetary assets and should be taxed on time; Another view is that investment in non-monetary assets is not an exchange of non-monetary assets, because at least the investee did not exist at the time of its establishment. However, in the tax practice at that time, the tax authorities generally handled the case according to the first viewpoint;
4) Under Circular No. 116 and Cai Shui [2009] No. 59 ("Circular No. 59"), the Ministry of Finance and the State Administration of Taxation ("MOF") have extended the Notice of the Ministry of Finance and the State Administration of Taxation on Issues Concerning Enterprise Income Tax Policies Concerning the Asset Restructuring of Enterprises in the China (Shanghai) Pilot Zone with Non-monetary Assets (Cai Shui [2013] No. 91, hereinafter referred to as "Circular No. 91"), which was piloted in the Shanghai Free Trade Zone, and issued Circular No. 116. The essence of the policy is to continue the basic spirit of Circular 118, but the difference is that the preferential tax treatment of 5-year equal apportionment of tax is directly granted without the approval of the tax authorities.
2.Evolution of individual income tax policy on investment in non-monetary assets
On 30 March 2015, the Ministry of Finance and the State Administration of Taxation promulgated the Notice of the Ministry of Finance and the State Administration of Taxation on Individual Income Tax Policies for Investment in Non-monetary Assets (Cai Shui [2015] No. 41, "Circular No. 41"), which, according to its preamble, aims to "further encourage and guide private individual investment" and "extend the policy of installment tax payment for investment in individual non-monetary assets piloted in the Shanghai Free ** Pilot Zone to the whole country". Circular 41 clarifies the long-awaited individual income tax policy for investments in non-monetary assets, and is a "sister" policy applicable to different types of taxes with Circular 116. The individual income tax policy on non-monetary investments in China's tax law is also evolving and complex, which is summarized in Table 1-2 below
Table 1-2: Evolution of Individual Income Tax Policies for Non-Monetary Asset Investments.
Note: According to the announcement of the State Administration of Taxation on the publication of the catalogue of tax normative documents invalid and repealed in full text and part of the provisions invalid and annulled (Announcement No. 2 of 2011 of the State Administration of Taxation), the full text of this document was repealed on January 4, 2011.
The evolution of the above policies reflects the changes in the understanding, attitude and stance of China's tax law on individual income tax on investment in non-monetary assets
1) The reason why Shui Han [2005] No. 319 is temporarily exempted from individual income tax is very simple, that is, the problem of "cash flow", or the internal requirements of the principle of necessary funds for tax payment or the principle of tax paying ability;
2) Guo Shui Fa [2008] No. 115 was issued and retracted, showing that the State Administration of Taxation is actually hesitant about the change of policy, undoubtedly if the individual has no cash how to pay taxes, and the article stipulates: "The tax shall be withheld and paid by the invested enterprise in the era when the individual obtains equity", but the invested enterprise receives non-monetary assets invested by individuals, and the tax payment requires "real gold" to forcibly require the invested enterprise to withhold, which is probably also "difficult for a clever woman to cook without rice";
3) Guo Shui Han [2011] No. 89 for the case of "Suning Global Shares *** Private Placement" is undoubtedly a "bolt from the blue" for individual shareholders who subscribe for additional shares with equity, of course, from the analysis of legal nature and principle, Nanjing Pudong Construction and Development Natural Person Shareholders participate in the private placement of Suning Global Shares after appraising the value of the company's equity they hold, which is undoubtedly an equity transfer, constituting a "property transfer" under the Individual Income Tax Law, and should be taxable. This article undoubtedly shows the SAT's approach to taxing individuals investing in non-monetary assets (equity is also a non-monetary asset). But it is still an old question, how to pay taxes if an individual obtains a private placement of shares issued by a listed company? From a practical point of view, this paper plays an "obstructive" rather than an "encouraged" role in the major asset restructuring of listed companies.
4) The promulgation of Guo Fa [2013] No. 38 adheres to the spirit that personal investment in non-monetary assets is a taxable behavior, but at the same time, it takes into account the "cash flow" of tax payment, and gives a preferential policy of 5 years of installment payment. In fact, the above-mentioned Circular No. 116 is to promote the policy of enterprise investment to the whole country, and the current Circular No. 41 only extends the policy of individuals to the whole country;
5) Announcement No. 67 of 2014 (hereinafter referred to as "Announcement No. 67") of the State Administration of Taxation clearly defines the "foreign investment or other non-monetary exchange of equity" of an individual as an equity transfer, and for other non-monetary transactions, it can be understood that an individual exchanges equity for the non-monetary assets of the counterparty (for example, the equity of the holding company or other non-equity non-monetary assets held by the other party), but this only stipulates the circumstances of equity investment or non-monetary investment, which is not a universal policy;
6) The Notice of the Ministry of Finance and the State Administration of Taxation on Individual Income Tax Policies Relating to the Investment of Individual Non-monetary Assets (Cai Shui [2015] No. 41, hereinafter referred to as "Circular No. 41") extends the spirit and policies of Guo Fa [2013] No. 38 to the whole country, which is consistent with the policy of Circular No. 116.
In the next issue, from a practical point of view, the enterprise income tax and individual income tax on investment in non-monetary assets will be **. It is hoped that all of you can deepen your understanding of the income tax policy for investment in non-monetary assets.
*: Park tax.
Author: Wu Shusheng.
*Editor: Mu Lin Financial News.