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China: Notice on further strengthening corporate tax collection and administration on equity transfer

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Khoonming Ho


Lewis Lu

Recently, the State Administration of Taxation of China (SAT) issued a notice on further strengthening the corporate income tax (CIT) collection and administration of equity transfer (the Notice). In the Notice, the SAT requires all local tax authorities to focus more on tax administration of equity transfer transactions as well as increase efforts on tax collection due to these equity transfer transactions. The Notice also imposes specific requirements for the local tax authorities to establish a data collection mechanism and tax collection management, as well as focus on transactions that may pose higher risk from tax administration perspective. The Notice emphasises that the local tax authorities should strengthen their supervision of equity transfer transactions by using information technology and exploring different channels for collecting information. The local tax authorities used to rely on taxpayers to provide the needed documents and information. Now the Notice stipulates that the local tax authorities are to collect information from both internal and external sources and compare/verify the information from different sources.

The Notice requires the local tax authorities to establish a working mechanism that determines the CIT treatment of equity transfers with certainty and consistent application. The local tax authorities are also asked to focus on the equity transactions – equity investment and distribution, share transfers, restructuring, liquidations, and so on – to determine whether the tax treatments (for example, the timing of recognition of the gains, the tax basis and the sale consideration on equity transfer) comply with the tax laws and regulations.

The Notice also sets out the key transactions and arrangements that are subject to inspection:

  • Equity transfers conducted or settled by non-cash considerations;

  • Dividends declared from equity investments that were held for less than 12 months;

  • Corporate internal restructuring;

  • Transactions involving equity transfer consideration that is unjustifiably low; and

  • Transfer of equity interest to low-tax jurisdictions.

According to the above key transactions and arrangements subject to inspection, the local tax authorities will focus on the timing of recognition of the gains, the tax basis and the sale consideration for equity transfers to see whether the taxpayer has accurately reported and paid CIT from the following perspectives:

  • Whether the investment cost of non-cash assets transferred was recognised correctly;

  • Whether the taxes were filed and paid correctly for dividends declared from equity investments that were held for less than 12 months;

  • Whether the share transfer price was reasonable; and

  • Whether the transferee of the equity is located in low-tax jurisdictions.

Taxpayers and enterprises should reconsider the tax impact and the tax filing requirements with respect to their planned restructuring and share transfers. Taxpayers and enterprises are also advised to review their completed share transfers and be prepared to provide supporting documents to reduce the risk of being challenged or questioned by the tax authorities.

Khoonming Ho (khoonming.ho@kpmg.com)

KPMG, China and Hong Kong SAR

Tel: +86 (10) 8508 7082

Lewis Lu (lewis.lu@kpmg.com)

KPMG, Central China

Tel: +86 (21) 2212 3421

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