Two foreign companies transferred equity in a Chinese company, originally thinking they could "make a fortune quietly," but the tax bureau came knocking, demanding millions in back taxes! Today, we'll delve into the "hidden tax bills" that overseas big players encounter when dealing with equity transfers in China.

Let's assume German Company A transfers its equity in Shanghai Company B to Singapore Company C. What taxes are involved in this "cross-border deal"?

1. Enterprise Income Tax: The tax type with the highest amount involved

 · Tax Rate: Default 10%, but the China-Germany and China-Singapore tax treaties may offer preferential rates of 5%-7% (a " Tax Residency Certificate" needs to be submitted).

 · Who Pays: German Company A is the taxpayer and needs to apply for temporary taxpayer registration on the Chinese e-tax service platform, then file and pay the tax.

Fun Fact: Often, if the equity transfer agreement doesn't specify who bears the tax, the transferor and transferee will need to negotiate further. Therefore, to protect the interests of both parties, it's recommended to clearly state the responsibility for tax payment when drafting the equity transfer agreement.

2. Stamp Duty: A Smaller Tax Bill

 · Tax Rate: 0.05%

 · Who Pays: Theoretically, Company A and C each pay half, but since the amount is usually small, the transferor often takes responsibility for the declaration obligation in China and pays it all.

3. Tax Treaties: Hidden Tax Coupons

 · If German Company A holds ≥ 25% of the equity in Shanghai Company B for more than 12 months, it may be eligible for "capital gains exemption" (under the China-Germany tax treaty).

 · If Singapore Company C is a "shell company" (without substantive business operations), the Chinese tax bureau may not recognize the tax treaty benefits!

⚠️ Failure Warning: A certain Hong Kong shell company claimed to be eligible for a 5% tax rate but was exposed by the tax bureau for having "no employees and no office," resulting in back taxes and penalties!

Case Story:

Dubai Company D sold its equity in a Beijing technology company to Cayman Company E for 1 RMB (actual valuation of 100 million RMB). The tax bureau directly intervened:

 · Step 1: Assessed the transfer income based on the proportion of net assets, demanding 8 million RMB in back taxes!

 · Step 2: Imposed an additional penalty of 2.4 million RMB because Company E failed to withhold the tax!

 · Outcome: The owner of Company D lamented, "If only I had consulted a Chinese accountant sooner!"

Conclusion:

Equity transfers between overseas companies involving Chinese entities may seem "free," but in reality, they are full of "hidden reefs"! Forward this article to the cross-border business owners around you and remind them to:

✅ Check tax treaties first to avoid missing out on benefits!

✅ Confirm withholding obligations to avoid hefty penalties!

✅ Hire a Chinese tax advisor – it's 10 times cheaper than paying back taxes later!

At PHC Advisory, we can offer you full support on matters regarding doing business in China, or any other issues your business may face. If you would like to know more about policies relevant to your business in Italy or Asia, please contact us at info@phcadvisory.com.  

PHC Advisory is a company of  DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance. 

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The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way. 

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