State Administration of Taxation, Measures for the Administration of Individual Income Tax on Income Derived from Equity Transfers (Trial Implementation)

Effective: January 1 2015

Applicability: For the purposes of these Measures, the term “equity” means theequity or shares of an enterprise or organisation established in China(hereinafter collectively referred to as “Investee Enterprises”; excludeswholly individually-owned enterprises and partnerships) invested in by anatural person shareholder (an Individual) (Article 2).

For the purposes of these Measures, the term “equity transfer” or“transfer of equity” means the act whereby an Individual transfers equity toanother individual or a legal person, including in the circumstances set forthbelow:

(1) sale of equity;

(2) buyback of equity by the company;

(3) when the issuer makes an initialpublic offering of new shares, sale by shareholders of the Investee Enterpriseof shares that they hold to investors in the form of a public offering togetherwith the initial public offering;

(4) transfer of title to the equity iscompelled by the judicial authority or an administrative authority;

(5) use of the equity to make aninvestment in a third party or carry out another non-monetary transaction;

(6) use of the equity to discharge a debt;or

(7) another act of equity transfer(Article 3).

These Measures shall not apply to transfers by Individuals on theShanghai Stock Exchange or Shenzhen Stock Exchange of shares of listedcompanies obtained on the listed company public offering and transfer market,to transfers of restricted shares or to other equity transfers subject tospecial provisions (Article 30).

Main contents: When an Individual transfers equity, the taxable income is thebalance remaining after subtracting the original value of the equity andreasonable expenses from the revenue derived from the equity transfer, andindividual income tax shall be paid thereon as for “income derived from thetransfer of property”.

The term “reasonable expenses” means the relevant taxes and leviespaid in accordance with provisions in connection with the equity transfer(Article 4).

If the equity transfer revenue reported is clearly on the low sideand without a legitimate reason therefor, the competent tax authority maydetermine the equity transfer revenue (Article 11).

Where equity transfer revenue that is clearly on the low sidesatisfies any of the following conditions, the same shall be deemed alegitimate reason therefor;

(1) valid documentation can be presentedshowing that the production and operations of the Investee Enterprise have beenmaterially affected by a revision of state policy, resulting in the equitybeing transferred at a low price;

(2) inheritance by, or transfer of theequity to, a spouse, parent, child, paternal grandparent, maternal grandparent,paternal grandchild, maternal grandchild, sibling or to a supporter with a directsupporting obligation to the transferor who can provide legally valid proof ofthe relationship;

(3) an internal transfer of equity held byan employee of the enterprise that cannot be transferred to another partyoutside the enterprise as specified in relevant laws, government documents orthe enterprise's articles of association and for which there is sufficientdocumentation to show that the transfer price was reasonable and real; or

(4) another reasonable circumstance inwhich the parties to the equity transfer can provide valid evidence showing thereasonableness thereof (Article 13).

The original value of equity transferred by an Individual shall beconfirmed as follows:

(1) for equity obtained by way of acapital contribution in cash, the original value of the equity shall beconfirmed as the total of the price actually paid and the reasonable taxes andexpenses directly related to the obtaining of the equity;

(2) for equity obtained by way of acapital contribution made in the form of non-monetary assets, the originalvalue of the equity shall be confirmed as the total of the price of thenon-monetary assets at the time of the investment as recognised or determinedby the tax authority and the reasonable taxes and expenses directly related tothe obtaining of the equity;

(3) for equity obtained by way of atransfer without consideration, if the circumstance set forth in Item (2) ofArticle 13 of the Measures applies, the original value of the equity shall beconfirmed as the total of the reasonable taxes and expenses incurred when theequity was obtained and the original value of the equity of the previous holderthereof;

(4) where the Investee Enterprise convertsa portion of its capital reserve, surplus reserve and/or retained profits intoshare capital and the individual shareholder has paid individual income tax inaccordance with the law, the original value of the equity that was convertedinto new share capital shall be confirmed as the total of the amount convertedand the relevant taxes and expenses;

(5) in circumstances other than thoseabove, the competent tax authority shall reasonably confirm the original valueof the equity based on the principle of avoiding the double levy of individualincome tax (Article 15).

Related legislation: Circular on the Issue of Provisionally Exempting theProceeds Derived in China by QFIIs and RQFIIs from the Transfer of Stocks andOther Such Equity Investment Assets from Enterprise Income Tax

Repealed legislation: Circular on Strengthening the Administration of theLevy of Individual Income Tax on Income Derived from Equity Transfers; and Announcement on theIssue of the Verification of the Tax Basis for Individual Income Tax onTransfers of Equity.

promulgated:2014-12-07effective:2015-01-01