Private Equity Tax Express - Issue 3, August 2014
Recently, the State Administration of Taxation of China (SAT) issued a notice on further strengthening the CIT collection and administration of equity transfer (the “Notice”). In the Notice, SAT states it 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.
Based on the Notice, local tax authorities are expected to tighten up the tax administration relating to equity transfer transactions, which could lead to an increase in the tax cost of corporate restructuring and share transfer transactions. In addition, the Notice signals the increased difficulty of conducting corporate restructuring or equity transfers between related parties based on investment cost or net book value as the equity transfer price. Therefore, enterprises should review the completed share transfer from tax reporting and tax compliance perspectives, and reconsider any planned restructuring in order to eliminate or reduce tax risk and control tax costs.