China further released new IIT preferential policies to benefit individuals investing in NEEQlisted companies as well as Venture Capital Funds

Transcription

1 News Flash China Tax and Business Advisory China further released new IIT preferential policies to benefit individuals investing in NEEQlisted companies as well as Venture Capital Funds December 2018 Issue 35 In brief Recently, the State Council has been paying close attention to the tax burden of individuals and has released preferential tax policies consecutively to improve the China IIT regime. On 30 November 2018, the Ministry of Finance (MOF), the State Administration of Taxation (SAT) and China Securities Regulation Commission (CSRC) jointly released the <Notice Regarding the IIT Policy on the Individual Transfer of Equity Listed Through the National Equities Exchange and Quotations (NEEQ)> (Caishui [2018] No.137, hereinafter referred to as Circular 137 ), clarifying the provisional IIT exemption treatment on income derived by individuals from the transfer of non-originally owned NEEQ-listed shares. Later on 12 December 2018, the State Council Executive Meeting decided to allow natural person partners of a qualifying venture capital (VC) fund in the form of a partnership to select to be taxed according to the 20% IIT rate applicable to the income category of income derived from equity transfer and income derived from dividends and profit distribution. The release of these two policies demonstrates the central government s commitment in promoting the equitability of taxation, boosting the capital market and supporting entrepreneurships and innovations in China. The release of Circular 137 and clarification on the IIT treatment of VC funds addresses several longstanding disputes. In this issue of China Tax and Business News Flash, we will summarise the IIT policies for NEEQ investors and natural person partners of VC funds, as well as share our observations. In detail IIT policy on the transfer of NEEQ-listed shares Policy development So far, 10,745 small and medium-sized enterprises (SME) have listed and issued their shares on the NEEQ, which is also known as the New Third Board. It is worth noting that NEEQ-listed companies and publicly listed companies are different conceptually. NEEQ-listed companies are supervised as non-listed public companies, and therefore cannot directly adopt the tax policies that are applicable to investors of listed companies. In order to create a robust environment for the NEEQ market and better resolve SME s financing difficulties, the State Council has, in 2013, put forward that the tax related policies for NEEQ investors shall, in principle, follow those applicable to investors of listed companies in China 1. At present, the IIT treatment on dividends derived from NEEQlisted shares by individuals is consistent with that on dividends derived from publicly listed shares, namely differentiated IIT treatment on dividend income 2. However, local implementations vary on the tax treatment on income derived from the transfer of NEEQ-listed shares by individuals, in the absence of clear tax policy. From the beginning of 2018, the dispute on whether income from the transfer of NEEQ-listed shares is subject to IIT has become more prominent and the taxable treatment of certain tax authorities has shaken the NEEQ market. As such, the State Council Executive Meeting held in September this year ultimately clarified that the tax policy for transferring NEEQ-listed shares by individuals in the secondary market shall follow the same tax treatment as publicly listed shares, i.e., IIT exemption on a net basis.

2 Different tax treatments on originally issued shares and non-originally issued shares Following the principle of mirroring the IIT treatment on transferring publicly listed shares to stimulate the secondary market for NEEQ-listed shares, Circular 137 sets forth different IIT treatments on the transfer of originally owned shares and nonoriginally owned shares. The income derived from the transfer of nonoriginally owned NEEQ-listed shares by individuals is temporarily exempt from IIT, while the income derived from the transfer of originally owned NEEQ-listed shares is subject to IIT at a rate of 20% under the category of property transfer income. The above rules are consistent with the IIT treatments on the transfer of publicly listed shares and restricted shares of public companies, in accordance with the principle of taxation in the primary market and exemption in the secondary market. The temporary IIT exemption on the transfer of NEEQlisted shares took effect from 1 November Regarding the administration on the individual transfer of originally owned shares, Circular 137 adopts different approaches to the transfer activities before and after 1 September Before that date, the administration on the transfer of originally owned NEEQ-listed shares by individuals shall be implemented according to the prevailing administrative measures for equity transfer by individuals, i.e., the share transferee shall be the withholding agent and the competent tax authority at the location of the invested enterprise shall be in charge of tax collection and administration 3. From 1 September 2019, on the transfer of originally owned NEEQlisted shares by individuals, security brokerage institutions who are the custodian of the shares shall be the withholding agent and the competent tax authority at their locations shall be in charge of tax collection and administration, with the administrative measures following those regulations applicable to the transfer of restricted shares of listed companies 4. From a long-term perspective, it will be more efficient and practical for security brokerage institutions to withhold taxes. From now on until September 2019, security brokerage institutions have been granted a transitional period to summarise information of NEEQ shareholders and to establish a set of withholding mechanism. Currently, the IIT exemption treatment applies to capital gains derived from the transfer of A-shares by individuals. It would be against the principle of tax fairness and significantly restrain investors from participating into the NEEQ market if the transfer of NEEQ-listed shares by individuals were taxed, which would also not be conducive to the healthy development of the NEEQ market. The issuance of Circular 137 clarifies that the IIT policy for the NEEQ market is consistent with that for the A-share market, which will strengthen the market confidence. We have summarised the IIT policy on income derived from the transfer of NEEQlisted shares and income derived from dividends respectively in the following appendix for your reference. IIT policy on natural person partners of VC funds in the form of partnerships Background It is widely discussed in the fund industry on whether natural person partners of private equity funds or VC funds in the form of partnerships could pay IIT based on the 20% IIT rate. Previously, several local-level governments issued relatively lenient IIT interpretation, but its sustainability remains in dispute. On 6 September 2018, the State Council Executive Meeting decided to maintain the stability of local tax policies that have been implemented in various regions to support VC funds. The overall principle for improving the tax policies on VC funds is not to retrospectively apply the rules and to ensure the overall tax burden does not increase 5. Natural person partners can select IIT calculation method the fund shall be subject to IIT at the rate of 20%; the second method is based on the annual taxable income of the VC partnership as a whole and natural person partners shall be taxed under the production and business operations income category at the progressive IIT rate of 5%-35% on the annual taxable income allocated from the partnership. This policy will be implemented for five years on a provisional basis. This piece of welcoming news will reduce the tax burden of natural person partners of VC funds in the form of partnerships. However, several technical issues need to be further clarified, such as: The State Council Executive Meeting held on 12 December clarified that, based on the principle of not to Whether all partners have to be retrospectively apply the rules and not subject to the same calculation to increase the overall tax burden for method? What is the tax taxpayers, starting from 1 January treatment for corporate partners? 2019, natural person partners of VC partnerships that have performed What is the tax treatment on certain record-filing administration exchange traded funds or fund of requirements can select their IIT funds investing in the VC funds? calculation method from the following two methods: the first method is based How to interpret VC partnerships on individual investment fund and that have performed certain natural person partners deriving record-filing administration income from equity transfer as well as requirements? For reference, the dividends and profit distribution from current tax preferential policies for VC enterprises mainly applies 2 PwC How to interpret based on individual investment fund under the first method? If a VC fund has multiple investment projects and exits from a number of projects at the same time, whether the income and losses from the equity transfer can be netted against each other, and the natural person partners can be taxed only on the net equity transfer income? When adopting the first method, whether the 20% IIT rate can also apply to interest income or other types of income derived by natural person partners? What is the tax treatment on partnerships operation expenses such as general and administrative expenses? Whether the prevailing tax regulation allowing dividends and profit distribution derived by natural person partners from investments by partnerships to be subject to 20% IIT rate is no longer applicable once the second method is adopted 6? Whether the selected calculation method can be changed according to VC partnership s annual operation result?

3 to enterprises that have performed record-filing according to the Provisional Measures on the Administration of Venture Capital Enterprises (NDRC Order [2005] No.39) and provisions on VC funds in the Provisional Measures on the Supervision and Administration of Private Investment Funds (CSRC Order [2014] No.105). The new policy shall take effect from 1 January We think that the MOF and SAT will release the implementation details soon. The industry is anticipating that the upcoming circulars will address the above uncertainties. The Takeaway China s IIT regime is experiencing a rapidly evolving process through the amendment of the IIT law, clarification of the exemption policy on transfer of NEEQ-listed shares, and the provision of IIT preferential policies for VC partnerships. Meanwhile, the State Council and China s legislature are proactively listening to the industries requests to enhance tax equality and certainty. After the IIT policy on the transfer of NEEQ-listed shares is clarified, taxpayers who has not settled the IIT on the transfer of non-originally owned shares can now enjoy exemption treatment following Circular 137. However, individual investors transferring originally owned shares shall have to settle IIT or underpayment according to the category of income derived from property transfer. Meanwhile, other NEEQ market players (i.e. share transferee, security brokerage institutions) shall pay close attention to the different withholding obligations on share transfers before and after 1 September 2019, as well as the tax payment locations. In particular, China Securities Depository and Clearing Corporation Limited and security brokerage companies shall have to complete the system transformation before 1 September 2019 to summarise the information of originally owned NEEQ-listed shares and non-originally owned shares and get ready for the information exchange with competent tax authorities. For natural person partners of VC partnerships, the principle of the new policy of not to retrospectively apply the rules and to ensure the overall tax burden does not increase is quite eyecatching. When determining the appropriate calculation method, these partners are suggested to assess the tax cost of two methods respectively, select a method that allows them to obtain the maximum tax benefit, and plan for the timing of exit by comprehensively considering the business profits of their invested projects, partnerships general and administrative expenses and other operation expenses. In addition, funds under the establishment stage can also consider their own investment direction, and strive to perform record-filing as VC funds in order to increase flexibility in their tax treatment. Endnote 1. Please refer to the <Decision Issued by the State Council on Certain Matters Regarding National Equities Exchange and Quotations> (Guofa [2013] No.49) 2. Please refer to the <Notice Jointly Issued by the MOF, SAT, and CSRC Regarding Certain Matters in Respect of the Implementation of Differentiated IIT Treatments for Dividend Income from Listed Companies> (Caishui [2012] No.85), the <Notice Jointly Issued by the MOF, SAT, and CSRC Regarding Certain Matters in Respect of the Implementation of Differentiated IIT Treatments for Dividend Income from NEEQ-listed Companies> (Caishui [2014] No.48), and the <Notice Issued by the MOF, SAT, and CSRC Regarding Certain Matters in Respect of the Differentiated IIT Treatments for Dividend Income from Listed Companies> (Caishui [2015] No.101) for more details. 3. <Public Notice Issued by the SAT Releasing the Administrative Measures for IIT Treatment on Gains Derived from Equity Transfer (Trial) > (the SAT Public Notice [2014] No.67) 4. Regarding tax administration on restricted shares, please refer to the <Notice Jointly Issued by the MOF, SAT and CSRC Regarding IIT Treatment on Income Derived by Individuals from the Transfer of Restricted Stocks of Listed Companies> (Caishui [2009] No.167) and the <Supplementary Notice Jointly Issued by the MOF, SAT and CSRC Regarding IIT Treatments on Income Derived by Individuals from the Transfer of Restricted Stocks of Listed Companies> (Caishui [2010] No.70) for more details. 5. For more details regarding tax policy on VC partnerships, please refer to the China Tax and Business News Flash [2018] Issue 27 and Issue Please refer to the <Notice of the SAT Regarding the Implementation Standard on the IIT Administration on Investors of Sole-proprietary Enterprises and Partnerships> (Guoshuihan [2001] No.84) 3 PwC

4 Appendix: IIT treatments on income derived from shares transfer and dividends through NEEQ Income category Timing of transfer/holding period IIT treatments Income shall be subject to IIT at the rate of 20% under the category of property transfer income Transfer of NEEQ-listed shares Originally owned shares Before 1 September 2019, the share transferee shall be the withholding agent, and the competent tax authority at the location of the invested enterprise shall be in charge of tax collection and administration After 1 September 2019 (inclusive), security brokerage institutions who are the custodians of the shares shall be the withholding agent, and the competent tax authority at their locations shall be in charge of tax collection and administration Non-originally owned shares Dividends from holding NEEQ-listed shares After 1 November 2018 (inclusive) Holding period is 1 month Holding period is between > 1 month and 1 year Temporary IIT exemption Transfers before 1 November 2018 which have not been dealt with shall follow Circular 137; No tax adjustment shall be need to transfers which have been dealt with The whole amount of dividend income shall be included as taxable income and subject to IIT at the rate of 20% under the category of property transfer income Only 50% of the dividend income shall be included as taxable income and subject to IIT at the rate of 20% under the category of property transfer income Holding period is > 1 year Temporary IIT exemption 4 PwC

5 For a deeper discussion of how this issue might affect your business, please contact: PwC s Global Mobility Services Team Central Jacky Chu +86 (21) jacky.chu@cn.pwc.com North Edmund Yang +86 (10) edmund.yang@cn.pwc.com South Louis Lam (20) louis.cs.lam@hk.pwc.com PwC s China Asset & Wealth Management Service Team Beijing Qing Ni (Assurance) +86 (10) qing.ni@cn.pwc.com Oliver Kang (Tax) +86 (10) oliver.j.kang@cn.pwc.com Scott Qian (Tax) +86 (10) Shanghai Jane Xue (Assurance)* +86 (21) jane.xue@cn.pwc.com Matthew Wong (Tax) +86 (21) matthew.mf.wong@cn.pwc.com Daphne Su (Tax) +86 (21) daphne.su@cn.pwc.com Kevin Xu (Assurance) +86 (21) kevin.xu@cn.pwc.com Kenny.Lam (Tax) +86 (21) kenny.lam@cn.pwc.com Frank Shan (Assurance) +86 (21) frank.shan@cn.pwc.com Stella.Fu (Tax) +86 (21) stella.fu@cn.pwc.com Shenzhen Tracy Cao (Assurance) +86 (755) tracy.c.cao@cn.pwc.com Guangzhou Janet Xu (Tax) +86 (20) janet.xu@cn.pwc.com Kevin Huang (Tax) +86 (755) kevin.j.huang@cn.pwc.com Cindy Li (Tax) +86 (755) cindy.j.li@cn.pwc.com Hong Kong Florence Yip (Tax)** florence.kf.yip@hk.pwc.com Puay Khoon Lee (Tax) puay.khoon.lee@hk.pwc.com Jeremy Ngai (Tax) jeremy.cm.ngai@hk.pwc.com David Kan (Tax) david.kh.kan@hk.pwc.com * China Asset and Wealth Management Leader ** China/ Hong Kong Tax Leader, Financial Services, Asset and Wealth Management 2018 PricewaterhouseCoopers Consultants (Shenzhen) Ltd. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Consultants (Shenzhen) Ltd. which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

6 In the context of this News Flash, China, Mainland China or the PRC refers to the People s Republic of China but excludes Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Region. The information contained in this publication is for general guidance on matters of interest only and is not meant to be comprehensive. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual PwC s client service team or your other tax advisers. The materials contained in this publication were assembled on 14 December 2018 and were based on the law enforceable and information available at that time. This China Tax and Business News Flash is issued by the PwC s National Tax Policy Services in China and Hong Kong, which comprises of a team of experienced professionals dedicated to monitoring, studying and analysing the existing and evolving policies in taxation and other business regulations in China, Hong Kong, Singapore and Taiwan. They support the PwC s partners and staff in their provision of quality professional services to businesses and maintain thought-leadership by sharing knowledge with the relevant tax and other regulatory authorities, academies, business communities, professionals and other interested parties. For more information, please contact: Matthew Mui +86 (10) matthew.mui@cn.pwc.com Please visit PwC s websites at (China Home) or (Hong Kong Home) for practical insights and professional solutions to current and emerging business issues PricewaterhouseCoopers Consultants (Shenzhen) Ltd. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Consultants (Shenzhen) Ltd. which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.