When a foreign company holds shares in a Chinese listed company and trades in open markets such as the Shanghai Stock Exchange and Shenzhen Stock Exchange, should the foreign company pay VAT? The issue of how foreign companies other than qualified foreign investors (QFIIs) should pay VAT for the transfer of shares of listed companies has always been a difficult one.
On 22 January 2020, China Taxation News reported a case in Dalian that provided a good reference regarding how foreign companies that are not QFIIs should transfer listed companies’ shares in compliance with the VAT rules.
Overseas company B held the original shares of listed company A. B sold A’s shares on the Shanghai Stock Exchange after the original restricted stocks were released. A consulted the Dalian tax authority on how B should pay VAT.
Tax obligation. According to the Notice of the Ministry of Finance and the State Taxation Administration on the Comprehensive Implementation of the Pilot Reform of the Business Tax to Value Added Tax (Notice 36), the transfer of securities is a “transfer of financial goods”, which is a kind of financial service and subject to 6% VAT. Notice 36 also provides that QFIIs entrusting domestic companies to engage in securities trading in China are exempted from VAT.
Since company B is not a QFII and cannot enjoy the preferential tax exemption policy, it should pay 6% VAT on the transfer of its securities.
Tax calculation. According to Notice 36, VAT payable is calculated as follows: (1) tax payable = current output VAT – current input VAT; and (2) output tax = sales × tax rate.
In this case, company B is an overseas company with no input VAT, and the transfer of financial products is subject to a 6% tax rate, so the focus of the calculation is how to determine the sales of its stock transfer. Sales should be determined by the balance of the selling price minus the purchase price. The selling price is obviously the price at the time of stock transfer.
The only remaining issue is the determination of the purchase price. According to the Announcement of the State Taxation Administration on Several Issues Concerning the Collection and Management of the Pilot Reform of the VAT Reform, if a company transfers its restricted shares, the following provisions shall apply in determining the purchase price: “The purchase price of restricted shares formed by the company’s initial public offering (IPO) and listing is the issue price of the listed company’s IPO.”
Therefore, company B should calculate the sales value based on the selling price of the transferred shares minus the issue price of company A’s IPO, and pay 6% VAT accordingly.
Tax payment method. In China, the purchaser of a share transfer is obligated to withhold VAT for the seller as a withholding agent.
However, since company B transferred the shares through the Shanghai Stock Exchange, the purchasers were countless investors from the open market. In this case, it is impossible to determine who the specific purchaser is, which means that company B has no clear VAT withholding agent.
In response to this, the Dalian Tax Bureau no longer looked for withholding agents, but arranged for company B to apply for temporary tax registration so that it could pay VAT for the stock transfer through self-declaration.
This case provides a good reference for the issue of foreign companies paying VAT on the transfer of shares of domestic listed companies in the open market. There are three steps involved in solving this problem:
- Determine whether VAT needs to be paid based on whether the overseas company is a QFII. If it is, then it is exempted from VAT, and if not, it is subject to 6% VAT;
- The sales value is calculated based on the selling price of the transferred stock minus the issue price at the IPO, and the VAT taxable amount is calculated accordingly; and
- Due to the particularity of open market stock transfers, foreign companies can declare and pay VAT on their own through a temporary tax registration at the tax bureau, without having to find withholding agents.
In this case, company B voluntarily pays VAT. In practice, offshore entities seldom voluntarily pay VAT to PRC tax authorities where the PRC buyer is unidentifiable or fails to withhold the tax. However, the authors have seen increasing scrutiny from tax authorities on VAT collection from foreign taxpayers for their transfer of PRC financial products, and suggest that taxpayers consult their tax advisers to avoid any tax non-compliance.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Danian Zhang (Shanghai) at danian.zhang@bakermckenzie.com
