Author: Wang Quan, litigation lawyer, Gui Yiwei, litigation lawyer|Note: Yes.
【Tax Law Writing】Press
In practice, due to the interdisciplinary nature of corporate capital, most people and even accounting professionals cannot make an accurate distinction between capital reserve, surplus reserve, statutory reserve fund and undistributed profits, and many enterprises do not know how to clearly divide the conversion of enterprise capital into share capital and carry out compliant tax treatment. In the previous article "Legal and Tax Considerations of Companies under Different Equity Structure Models", we briefly mentioned the tax issue of the company's conversion to share capital, and in order to facilitate enterprises to fully grasp the tax-related legal issues of the company's conversion to share capital, this article further analyzes and shares.
[Lawyer's summary].
1. How to distinguish between capital accounts such as capital reserve, surplus reserve, discretionary reserve, statutory reserve fund, undistributed profits, etc.?
First of all, the above capital items are all owner's equity items in accounting standards. Owners' equity includes paid-in capital (share capital), capital reserve, surplus reserve, undistributed profits and other items. Secondly, the surplus reserve fund belongs to the owner's equity item after the distribution of the after-tax net profit of the enterprise, and the undistributed net profit is the owner's equity item of the undistributed profit, that is, the surplus reserve fund is essentially the net profit of the enterprise, but the accounting has been converted and bookkept. The statutory provident fund and the discretionary provident fund are derived from the provisions of the Company Law and are legal concepts. According to the provisions of the Company Law, "when a company distributes the after-tax profits of the current year, it shall withdraw 10% of the profits and include them in the company's statutory reserve fund", and "by resolution of the shareholders' meeting or the general meeting of shareholders, it may also withdraw any reserve fund from the after-tax profits". Therefore, the statutory provident fund and the arbitrary provident fund are also the owner's equity after the profit distribution, which is essentially the net profit of the enterprise. In terms of accounting treatment, the statutory provident fund and the arbitrary provident fund belong to the sub-subjects of the surplus provident fund, or it can also be directly expressed as the surplus provident fund = statutory provident fund + arbitrary provident fund. Finally, capital reserve items include equity premiums, revaluation and appreciation of statutory assets, and the value of assets received from donations. Among them, the share capital premium refers to the part of the capital invested by the shareholders in excess of the share capital, which is essentially the investment of the shareholders' equity costs. In addition, the capital reserve item has nothing to do with shareholders' capital contributions, and is reflected in the increase or decrease of owners' equity (generally net assets) in accounting, but this increase has nothing to do with corporate earnings. Therefore, we can regard the capital reserve - capital premium as the investment of shareholders' equity costs, and although the capital reserve (other capital reserves) increases the company's assets, it is not the investment of shareholders' equity costs, nor is it the income of the enterprise. Based on this, from the scope of the concept, we can summarize the following diagram:
As for why the above concepts are distinguished at the beginning, on the one hand, most people in practice cannot distinguish between them, and even legal professionals and accounting professionals cannot clearly define them. On the other hand, it is this kind of distinction and definition, which provides a basic theory for us to accurately understand and deal with the legal and tax compliance and tax-related treatment of different capital account conversion to share capital.
2. How do natural person shareholders pay taxes when they increase their share capital?
The company's conversion of capital includes the company's transfer of shares to shareholders with capital reserves, surplus reserves and undistributed profits and other owner's equity items, which specifically reflects the increase in the number of ** held by shareholders (or registered capital), and the change of internal accounts of company-level ownership projects, but the net assets of the company have not changed. There are significant differences in the tax treatment of the conversion of share capital for different owner's equity items. Let's first take a look at the differences between natural shareholders in different projects to increase share capital. First, as mentioned above, both surplus reserve fund and undistributed profit are related to the company's net profit, but it is only a difference in whether the accounting treats the net profit internally. Therefore, the company's act of converting the surplus reserve fund and undistributed profits to shareholders to increase share capital is essentially the act of the company first distributing profits to shareholders, and then the shareholders investing capital in the company with dividends. For the company's dividends to shareholders, natural person shareholders are required to pay individual income tax at a rate of 20% on "interest, dividends and bonus income"; The act of shareholders investing capital in the company with dividends does not fall within the scope of taxation in law. Second, as mentioned above, the capital reserve - capital premium belongs to the capital investment of shareholders in excess of the amount of capital contributed by shareholders, and belongs to the cost of capital contribution by shareholders. The company's conversion of capital premium to capital increase does not change the nature of capital ** to shareholders' contributions, and there is no income reflected at the company level. Based on this reason, if the company converts capital to increase capital at a capital premium, it is not regarded as distributing dividends to shareholders, and natural person shareholders do not need to pay individual income tax. However, in practice, when most tax authorities understand the tax documents, from the perspective of interpretation, they believe that the situation that the capital premium is converted into capital does not need to declare and pay individual income tax is only applicable to shares, not to limited liability companies. The specific reason is that "for the conversion of registered capital and share capital with undistributed profits, surplus reserves and other capital reserves other than the issuance of ** premium, individual income tax shall be levied in accordance with the current policy provisions according to the item of "interest, dividend and bonus income", and the "** premium" refers to the shares *** and does not refer to the limited liability company with "equity premium". Of course, we still believe that this kind of excessively restrictive and rigid understanding is inconsistent with the basic principle of "tax statutory" and also violates the principle of "tax fairness". In practice, if the equity premium of a limited liability company is converted into an increase in share capital, the enterprise may apply to the higher tax department for administrative reconsideration after the tax is paid. Third, for other capital reserves other than capital premiums, as mentioned above, the cost of equity input that does not belong to the shareholder level increases the owner's equity of the company when it is formed, and for the shareholders, its equity assets are increased. Therefore, when the company transfers other capital reserves to shareholders to increase share capital, it should be regarded as dividends to shareholders, and natural person shareholders are subject to individual income tax. In addition, according to Cai Shui [2015] No. 101 and the Ministry of Finance, the State Administration of Taxation, and the Announcement No. 78 of 2019, the natural person shareholders of listed companies and enterprises can enjoy "differentiated" preferential tax policies when they obtain the conversion of surplus reserves, undistributed profits, and other capital reserves into share capital except for the issuance of ** premiums. The specific preferential arrangements are: if an individual holds ** for a holding period of more than 1 year, the income from dividends and dividends will be temporarily exempted from individual income tax; If the holding period is more than 1 month to 1 year (including 1 year), the dividend income shall be temporarily reduced by 50% and included in the taxable income; If the holding period is less than 1 month (including 1 month), the full amount of the dividend income shall be included in the taxable income. Among them, the holding period of the relevant restricted shares is determined in accordance with Cai Shui [2012] No. 85, that is, the dividends and dividends obtained after the lifting of the ban on the restricted shares of listed companies held by individuals shall be calculated and taxed in accordance with the provisions of this notice, and the holding time shall be calculated from the date of lifting the ban. As for the determination of the holding period of the restricted shares of the enterprise, the tax department has no special provisions, and it should be determined in accordance with the general provisions, that is, the date of obtaining the equity from individual shareholders. According to the provisions of the Cai Shui [2015] No. 116 document, "since January 1, 2016, when small and medium-sized high-tech enterprises nationwide transfer their share capital to individual shareholders with undistributed profits, surplus reserve and capital reserves, if the individual shareholders have difficulties in paying individual income tax at one time, they can formulate their own installment tax payment plan according to the actual situation, pay in installments within no more than 5 calendar years (inclusive), and report the relevant information to the competent tax authorities for the record." "The above-mentioned small and medium-sized high-tech enterprises refer to enterprises registered in China for audit and collection, which have been recognized as high-tech enterprises, and whose annual sales and total assets do not exceed 200 million yuan, and the number of employees does not exceed 500.
3. How do the corporate shareholders of the company pay taxes when they increase their share capital?
Before analyzing how corporate shareholders of a company pay taxes when they increase their share capital, we clarify a basic principle, that is, the Enterprise Income Tax Law stipulates that "dividends, bonuses and other equity investment income between qualified resident enterprises shall be regarded as tax-exempt income and shall be exempted from enterprise income tax." With regard to the determination of resident enterprises, the Enterprise Income Tax Law also clearly stipulates that "the term "resident enterprises" in this Law refers to enterprises established in China in accordance with the law, or established in accordance with the laws of foreign countries (regions) but with actual management institutions in China." According to the above provisions, if the company converts the share capital to the company's corporate shareholders (resident enterprises) with undistributed profits, surplus reserve funds, and other capital reserves other than ** premium, although it is dividend income, it is exempt from enterprise income tax. Referring to the above analysis, if the capital reserve formed by the shares at the highest premium is transferred to the shareholders of the company's legal person, it is not regarded as dividends and does not belong to the scope of enterprise income tax. As for the capital reserve formed by a limited liability company at an equity premium, in practice, it is not subject to enterprise income tax, regardless of whether it is recognized as a dividend or not. In addition, according to the provisions of the Regulations for the Implementation of the Enterprise Income Tax Law, "the equity investment income such as dividends and bonuses referred to in Items (2) and (3) of Article 26 of the Enterprise Income Tax Law does not include the investment income obtained from the public offering and listing of resident enterprises for less than 12 months." That is, if the company's corporate shareholders hold the listed company for less than 12 months, the dividend income obtained by them does not belong to the scope of tax exemption and needs to pay enterprise income tax.
4. How do unincorporated shareholders of a partnership pay taxes when they increase their share capital?
Different from natural person shareholders and corporate shareholders, unincorporated units of partnership enterprises are not taxpayers at the income tax level. When calculating the income tax of the partnership, it is necessary to penetrate to the investors of the partnership. Therefore, it is particularly complicated to pay taxes on the unincorporated shareholders of a partnership when they convert their share capital. Its complexity is reflected in the following aspects: First, if the partner is a natural person, whether the dividends and bonus income obtained by the partnership are subject to individual income tax according to the operating income? Second, if the partner is a natural person, does the dividend and bonus income obtained by the partnership from the listed company and the first company enjoy the "differentiated" preferential tax policy? Third, if the partner is a natural person, is the capital reserve of the invested company obtained by the partnership converted into share capital at a capital premium not taxed? Fourth, if the partner is a corporate legal person, is the dividend and bonus income obtained by the partnership tax-exempt? Fifth, if the partner is a legal person of the company, is the capital reserve formed by the invested company at a capital premium obtained by the partnership not taxed? (1) For the first question, we mentioned in the previous article "Summary of Legal Issues Concerning the Taxation-related Issues of Partnership Enterprises' Foreign Investment in Equity" that the interest, dividends and bonuses distributed by the partnership due to foreign investment shall not be incorporated into the income of the partnership, but shall be separately regarded as the interest, dividends and bonus income obtained by the investor, and the individual income tax shall be calculated and paid according to the taxable item of "interest, dividend and bonus income". (2) As to the second question, since the preferential tax policy of differential dividends and dividends is aimed at individual shareholders, the dividends and dividends obtained by shareholders of a partnership enterprise are not subject to the above-mentioned policy provisions. (3) With regard to the third question, we insist that the conversion of capital reserve into share capital formed at a capital premium is not regarded as a dividend, so the conversion of share capital obtained by a natural person through a partnership is not subject to individual income tax. However, the conversion of capital reserve other than the capital premium into capital should still be regarded as dividends, and individual income tax needs to be calculated and levied separately on the income from dividends and dividends. It should be pointed out that when applying Guo Shui Fa [1997] No. 198 and Guo Shui Fa [2010] No. 54, it is still very likely that the tax authorities will still determine that the above-mentioned documents are not applicable to other types of shareholders other than individual shareholders and the conversion of capital premium to share capital of a limited liability company in the spirit of restriction and interpretation. (4) As for the fourth question, resident enterprises mentioned in the provisions of the Enterprise Income Tax Law on the exemption of dividends between resident enterprises do not include sole proprietorship enterprises and partnership enterprises. Therefore, the dividends and dividends obtained by the company through the indirect investment of the partnership do not belong to the above-mentioned tax exemption and need to be subject to enterprise income tax. (5) For the fifth question, the basic principle of the third question is that the conversion of capital reserve into share capital formed by capital premium is not regarded as dividends, and if the partner is a corporate legal person, no enterprise income tax shall be levied. However, the conversion of capital reserves other than capital premiums into capital is regarded as dividends and needs to be subject to corporate income tax.
In addition to the tax policies mentioned above, the tax policy documents cited in this article also include: Guo Shui Fa [1997] No. 198, Guo Shui [1998] No. 333, Guo Shui Han Fa [1998] No. 289, Guo Shui Fa [2010] No. 54, Cai Shui [2015] No. 116, etc. 