1. What circumstances does "Individual Shares Transfer" refer to?

According to the STA Announcement [2014] No. 67, Shares Transfer is the act of transferring an individual's shares to another individual or legal person, including (1) selling shares; (2) enterprises' repurchasing of shares; (3) when an issuer issues news shares for an IPO, the shareholders of the invested enterprise selling their shares to the investor together with the public offering; (4) forced shares transferring by judicial or administrative authorities; (5) outward investment or other non-monetary transactions in shares; (6) shares against debt; (7) other acts of shares transfer.

Among them, in the case where an individual sells shares and applies to the Market Supervision Department for the registration of the change of shareholders of a limited liability company or for the filing of the amount of capital contribution subscribed by the shareholders, the department will check the tax-paid form of the individual income tax related to the share transaction.

2. What does "Individual Shares Transfer Income" refer to?

According to the STA Announcement [2014] No. 67, Article 7 provides that Individual Shares Transfer Income refers to the economic benefits in the forms of cash, in-kind, marketable securities, etc., which are received by the transferor as a result of Shares Transfer.

Article 8 provides that all kinds of payments obtained by the transferor in connection with the transfer of shares, including liquidated damages, compensation, and other names of the payments, assets, and interests, shall be included in Shares Transfer Income.

Article 9 provides that subsequent income obtained by the taxpayer after meeting the agreed conditions specified in the contract shall be regarded as Shares Transfer Income.

Article 10 provides that income from share transfer shall be determined with the arm's length principle.

3. How to calculate and pay individual income tax for Individual Shares Transfer?

According to the STA Announcement [2014] No. 67, Article 4 provides that when an individual transfers shares, the balance of the shares transfer income minus the original share value and reasonable expenses, shall be the taxable income and shall be subject to individual income tax on the basis of "income from transfers of property."

Reasonable expenses refer to the relevant taxes paid in accordance with the regulations at the time of share transferring.

According to Article 3 of the Individual Income Tax Law, for income from interest, dividends or bonuses, income from the lease of property, income from transfers of property, and incidental income, a proportional tax rate of 20 percent shall be applied.

4. How to determine who are the taxpayers and withholding agents for the individual income tax on Shares Transfer?

According to the STA Announcement [2014] No. 67, Article 5 provides that the transferor of the shares is the taxpayer and the transferee is the withholding agent for the individual income tax on Shares Transfers.

5. How to recognize the original value of shares when an individual transfers shares?

According to the STA Announcement [2014] No. 67 article 15, the original value of shares transferred by an individual is recognized in accordance with the following method: (1) The shares acquired by cash shall be recognized by the sum of actual payments and the reasonable related taxes; (2) The shares acquired by means of non-monetary assets shall be recognized by the sum of the price of the non-monetary assets approved by the tax authorities at the time of investment and the reasonable related taxes; (3) The shares acquired through gratuitous transfer under the circumstances listed in paragraph 2 of Article 13, the original value of the shares shall be recognized as the sum of the reasonable taxes and the original shares value of the original shareholder; (4) If an invested enterprise converted capital reserves, surplus reserves and undistributed profits into share capital, the original value of the newly increased share capital shall be recognized by the sum of the increased capital and the related tax; (5) Apart from the above circumstances, the competent tax authorities shall recognize the original value of the shares according to the principle of avoiding double taxation of individual income tax.

6. How to confirm the tax declaration place for Individual Shares Transfer?

According to the STA Announcement [2014] No. 67 article 19, the tax authority where the invested enterprise is located shall be the competent tax authority for individual income tax declaration on the Individual Shares Transfer.

7. Does Shares Transfer Income refer to the cash income?

According to the STA Announcement [2014] No. 67 article 7, Shares Transfer Income refers to cash, in-kind, marketable securities and other forms of economic benefits received by the transferor.

8. Do I have to pay individual income tax on a gratuitous transfer of shares between relatives?

Whether a gratuitous transfer of shares between relatives is taxable or not needs to be judged by different situations.

According to the STA Announcement [2014] No. 67 article 13, individual income tax may be suspended for gratuitous transfers of shares in the following cases: inheritance or transfer of shares to the spouse, parents, children, grandparents, grandchildren, siblings who can provide the certificate of identity relationship with legal validity, as well as to supporters or providers who undertake the obligations of direct support or alimony to the transferor.

Apart from the above circumstances, if the income of shares transfer between relatives is declared obviously low with no justifiable reason, the tax authorities may recognize the transfer income, which shall be calculated into individual income tax.

Source: State Taxation Administration 12366 Shanghai (International) Tax Service Center (SITSC)