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Chinese Tax Regulation Update | May 2015

China
27/05/2015
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Circular
Number

Issuance Date Effective Date Topic What is new?
Caishui [2015] No.41 2015-3-30 2015-4-1 Individual Income
Tax (“IIT”) treatment
of non-monetary asset
investments by
individuals		 The Circular clarifies that a non-monetary asset investment by individuals should be treated as two transactions from PRC IIT perspective: asset transfer and investment.

The capital gains for tax purposes of “asset transfer” due to non-monetary asset investment are to be determined based on the fair market value of the non-monetary assets upon appraisal minus the original cost of the assets and reasonable taxes and surcharges. The applicable IIT rate is 20% for the tax item “gains from transfer of property”.

Individuals must declare and pay IIT within 15 days after the end of the month the investment occurred. The Circular permits individual investors to pay IIT in instalments within five calendar years after the day when the taxable activity occurred. If there are cases where tax assessment is till open and such investments occurred within the last five years, the IIT of these investments can be amortized during the remaining period (i.e., five calendar years minus the period from the time when the investments occurred till now).

Despite the instalment option, if individuals receive cash consideration during investment, the cash must first be used for tax payment and the outstanding tax liability can be settled in instalments. If investors transfer equity interest and receive cash consideration during the instalment period, the cash consideration must also first be used for tax payment.
SAT Announcement [2015] No.20 2015-4-8 2015-4-1 Administration of IIT of non-monetary asset investments by individuals

The Announcement is a supplementary regulation to the Circular Caishui [2015] No.41 (“Circular”). It mainly defines or clarifies the following terms in the Circular:

  • Who to declare the IIT: the individual taxpayer himself / herself;
  • Where to declare the IIT: - Local tax bureau where the property is located if real property is contributed; - Local tax bureau where the company whose equity is used for investment is located; - Local tax bureau where the investee company is located if other non-monetary assets are contributed.
  • Original cost of assets for investment: actual expenditure incurred on the assets. If the individual fails to provide accurate documentation evidencing the asset cost, deductible cost will be deemed by the tax authorities.
  • How to apply for instalment payment of IIT: for investments after 1 April, 2015, the taxpayer should prepare an instalment payment plan and submit required documents within 15 days after the end of the month when the investment occurs; for investments before 1 April 2015, recordal procedures should be completed within 30 days after the Announcement was promulgated.
  • What if the IIT instalment payment plan is changed: the taxpayer should submit an updated application plan and recordal form to the tax authorities.
Caishui [2015] No.37 2015-3-31 2015-1-1 till 2017-12-31 Deed Tax (“DT”) related to enterprise restructurings

The Circular clarifies the DT treatments arising from various types of enterprise restructurings. In particular, attention should be paid on preferential DT treatments due to the following common restructuring arrangements:

  • Corporate merger If the investors of a merged company stay as investors of the surviving company after the merger, DT is exempted for immovable property absorbed from the merged company.
  • Corporate divestiture If the investors of the pre-divestiture company continue to hold interests in the spun-off companies, DT is exempted for immovable property absorbed from the pre-divestiture company.
  • Share transfer Since the target company’s ownership of immovable property does not change under a share transfer arrangement, no DT shall be triggered.
SAT Announcement [2015] No.33 2015-5-8 2014-1-1 Administration of CIT of non-monetary asset investments by enterprises

The Announcement is a supplementary regulation to the Circular Caishui [2014] No.116 (“Circular”). It clarifies the following issues in CIT taxation of non-monetary asset investments by enterprises:

  • Capital gains due to non-monetary asset investment can be evenly recognized and deferred for CIT purpose within five years from the year of asset transfer;
  • The asset transfer due to non-monetary asset investment between related parties shall be realized when the investment agreement takes effect, if the procedures of shareholder change are not completed within 12 months after the agreement takes effect;
  • The enterprise can select the application of either the treatment in this Announcement or the “special tax rules” specified under Circular 59 and auxiliary regulations, if the non-monetary asset investment also qualifies for special tax rules;
  • The enterprise should prepare for tax authorities’ inspection sufficient documents such as investment agreement, valuation report of the asset for investment, tax basis of the asset for investment, documents of incorporation or change of investment of the invested enterprise.

The treatments in the Circular and Announcement also apply to any cases originating from before 2014, for which the tax assessment has not yet been completed.
Announcement [2015] No.34 2015-5-8 2014-1-1 Deduction of salary and employee welfare expenses for CIT purpose

The Announcement clarifies the following policies of deductibility of salary and employee welfare expenses for CIT purposes:

  • Circular Guoshuihan [2009] No.3 defines the allowances which can be treated as salary cost for CIT deduction purpose. The Announcement emphasizes that any allowance outside of the defined scope in the above circular should be treated as “employee welfare” and is subject to limited deduction (i.e., within 14% of salary cost);
  • Cost of salaries which are settled before the annual CIT declaration can be deducted for CIT purpose for the declared year;
  • Reimbursements paid to an HR company dispatching employees should be treated as service fee and expenses directly paid to employees should be treated as salary or welfare.

The stipulations in the Announcement also apply to any case having occurred before 2014 where tax assessment has not yet been completed.

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