China: The Challenges of Taxing Cross-border Third Party Payment

Introduction 

NEEQ is an important part of the multi-level capital market in China. NEEQ is a special capital market, which specifically provides financial support for the enterprises that are not up to the standard of the main board (including small and medium-sized plate) and the GEM listing conditions of enterprises. Currently, NEEQ is not only providing the services to the science and technology enterprises, it also provides its services to manufacturing, cultural industry, financial industry and others. 

The conditions for NEEQ listing by regulations: 

1. Set up in accordance with the law and remain for two years 

2. Clear Business Plan and able to continue in operations 

3. Good corporate governance mechanism and legitimate business 

4. Clear equity structure and the issuance and transfer of share are in accordance with law 

5. Recommended and supervised by brokerage 

Related tax risks 

1. Personal investment in non-monetary assets 

Individual shareholders invested in stocks of nonmonetary assets such as intangible assets, without paying individual income tax meanwhile amortized the intangible assets over certain number of years. According to the tax policy notice relating to the personal non-monetary assets investment (Public Notice [2015] No. 41), when individuals invest in stocks of non-monetary assets; the assignment of non-monetary assets and investment take place at the same time. The income of personal assignment for non-monetary assets is taxable and individual income tax is computed in accordance with the law “property transfer income”. The non-monetary assets are transferred at fair value in accordance with valuation from relevant authority. The taxable income is the fair value of non-monetary assets on transfer reduced by the original value of the assets and related taxes. 

2. The record of special tax treatment 

The enterprises which had applied the special tax treatment in the process of restructuring, did not always file in the records to the competent authority. Such application of special tax treatment should be put on records according to the eleventh rule of “the Notice of the reorganization of the business enterprise income tax treatment” (Public Notice [2009] No.59). If the parties of restructuring enterprise require the acknowledgement of tax authorities, leading party may apply to the tax authorities and file in the records to the provincial tax authorities respectively. 

3. Deed tax, business tax and land value increment tax 

Enterprises involve in major restructuring exercise did not pay the respective deed tax, business tax and land value increment tax. In accordance with the provisions of the tax law, the transfer of the physical assets and related rights, debt and labor force to other units and individual through merger, division, sell and exchange in the process of assets reorganization, do not attract business tax. Similarly, the transfer real estate and the right of use of land also do not attract business tax. According to the fifth rule of “the tax policy notice of land value increment tax in the process of enterprise reorganization“ (Public Notice [2015] No.5), land value increment tax is temporarily not imposed on restructuring exercises which fulfilled certain conditions. 

Recently, tax disputes involving NEEQ is growing, hence, the above article mainly elaborated the common tax risks in the process of National Equities Exchange and Quotations listing, which means both parties of NEEQ should fulfill their tax obligations. At the same time, the two parties can do some proper tax planning to reduce their taxes legitimately.

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