China alters its tax law for investments in enterprises

China alters its tax law for investments in enterprises

A new announcement by the Chinese State Administration of Taxation (SAT) concerns individual income tax on share capital increases

The new specification makes clear that on the original accumulated surplus after the acquisition of an enterprise and by individual investors the new shareholder does not to pay individual income tax, however under the condition that the acquisition of the equity is made at a price no less than its net asset value. The reason that no additional tax has to be paid is the fact that these aspects (differences) are already reflected in the transaction price. However, if the difference between equity acquisition price and the original owner’s claims is not taken into account in the equity transaction price, the share capital increases obtained by the new shareholder with the accumulated surplus will be taxable under individual income tax as “interest, dividends and bonuses.

These are the facts triggering the rule: If one or more investors acquire 100 % shares of an acquired enterprise by equity acquisitions, prior to the acquisition, the accumulated surplus such as “capital reserves, surplus reserves, undistributed profits” has not been turned into share capital increases, but taken into account when fixing the equity transaction price, then the obligation to pay income tax doesn’t apply. Upon completion of the acquisition, the enterprise has converted the accumulated surplus in its original book value into the share capital increases of individual investors, and the obligation to pay individual tax arises.

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