Question content What are the procedures for foreign investment in equity transfer? And what are the tax issues involved? Thank you! Respondent Shi Jihai Content Li Li: Hello! There are three main types of taxes involved in the equity transfer of foreign-invested enterprises, namely: corporate income tax, business tax, and stamp duty. According to the provisions of the "Income Tax Law on Foreign-Invested Enterprises and Foreign Enterprises", foreign investors in foreign-invested enterprises shall pay foreign enterprise income tax on their equity transfer income, and foreign investors in foreign-invested enterprises shall pay foreign enterprise income tax on their equity transfer income. Income tax, the rate is 20% of the income earned. However, in many areas of China where preferential tax policies exist, the 20% tax rate can be reduced to 10%; if the country where the foreign investor is located has signed a double taxation avoidance agreement with China, the 20% tax rate can also be reduced to 10%. . If a Chinese investor transfers its equity in a foreign-invested enterprise, its income shall be subject to Chinese corporate income tax at a rate of 33%. Theoretically, if the equity of a foreign-invested enterprise is transferred at cost price without any gain, the foreign shareholder should not pay any foreign corporate income tax due to the equity transfer. However, in China’s tax practice, only if the equity restructuring of an associated enterprise is transferred at cost price, tax exemption approval can be obtained from the Chinese tax authorities. Chinese law stipulates that in a company reorganization for the purpose of reasonable operations, a foreign enterprise shall transfer the equity it holds in a domestic enterprise in China, or a foreign-invested enterprise shall transfer the equity it holds in a domestic or overseas enterprise in China to a company that has direct ownership. Or companies that indirectly own or are 100% owned by the same person, including transfers to domestic investment companies with the above-mentioned equity relationships, can be transferred at the cost of the equity. Since there is no gain or loss from the equity transfer, no income tax will be levied on it. In other non-affiliated company transactions, if the transfer is at cost of equity, the tax authorities will usually conduct a review to determine the authenticity of the transaction. If the tax authorities discover fraud, the tax authorities will order the foreign enterprise to pay foreign corporate income tax. Business tax, in the case of equity transfer, is mainly levied when the equity transferred is an intangible asset. If the investor invests in intangible assets, including trademarks, patents, proprietary technologies, copyrights, trademarks and other intangible assets, or invests in land use rights, he must pay a business tax of 5% of the transfer price when transferring the equity. If the transfer price is obviously low without justifiable reasons, the Chinese tax authorities have the right to determine the transfer price as the basis for business tax. Stamp duty is mainly a tax levied on contracts and other documents. The tax rate is 0.5%. The basis for calculating the tax is the equity transfer price or the actual value of the equity. In an example operation, a foreign investor of a foreign-invested enterprise transfers its capital contribution to the transferee free of charge. The main purpose is to avoid the provisions of Chinese tax laws. Since investors contribute capital in cash, in the case of a free transfer, both the transferor and the transferee do not need to pay any taxes to the Chinese tax authorities for the transfer. Thank you for your support! Respondent Shi Jihai Reply time: 2007-08-01 Content Li Li: Hello! There are three other points that need to be emphasized. First, after the equity transfer business occurs, the economic nature of the enterprise changes from foreign investment to domestic investment. According to the "Collection Management Law of the People's Republic of China" and its implementation rules, the original foreign-invested enterprise shall be tax liquidated. and cancellation procedures, and re-registration of domestic-funded enterprises for tax purposes. Second, if the foreign investor is a foreign individual, that is, if the individual investor obtains income from the transfer of equity, he shall pay personal income tax at a rate of 20% based on the income from property transfer in accordance with the "Individual Income Tax Law of the People's Republic of China". Specific tax issues should be consulted with the local tax authorities. If the foreign investor is an enterprise, he shall pay withholding income tax at a rate of 10% in accordance with Article 19 of the "Income Tax Law on Foreign-Invested Enterprises and Foreign Enterprises". That is, 10% of the equity transfer income is taxed.