State Administration of Taxation, Income Tax Issues Relevant to Enterprise Equity Assignment Supplementary Circular

Issued: March 25 2004
Effective: April 17 1997

Main contents: The Circular states that in the case of ordinary equity transactions (including transfer of stocks or shares), the cumulative retained earnings or cumulative surplus reserves of the investee party that should be shared by the equity assignor shall be recognized as income from equity assignment and shall not be recognized as income in the nature of dividends (Item One). In the case of liquidation of an enterprise or assignment of a wholly-owned subsidiary or an enterprise with 95% of the shareholding, the cumulative retained earnings or cumulative surplus reserves of the investee party that should be shared by the investing party shall be recognized as income in the nature of dividends of the investing party and may be deducted from the income from equity assignment of the investing party (Item Two). In the case of enterprise liquidation or assignment of all the equity of a subsidiary (or an independently audited branch company), the liquidated or assignee enterprise shall reduce its taxable income and increase its retained earnings according to the amount of all types of provisions for diminution in asset value such as loan loss reserves that have been offset and added to the taxable income in the past. The equity shares enjoyed by the assignor shall be recognized as income in the nature of dividends (Item Three).
Related legislation: Handling Questions Concerning Income Tax on Transfer of Equity by Foreign-invested Enterprises and Foreign Enterprises Circular, Apr 17 1997, CLP 1997 No.8 p11; Several Questions Concerning Income Tax When Enterprises are Re-organized or Change Their System Tentative Provisions, Aug 20 1998, CLP 1998 No.7 p7 and Income Tax Issues that Need to be Clarified in Relation to the Implementation of the «Enterprise Accounting System»Circular, Apr 24 2003, CLP 2003 No.5 p8