Foreign companies’ misuse of the deferral of tax payment policy results in a total of CNY 8 million of taxes and fines!

 

Company J is a Chinese sole proprietorship mainly engaged in the production and sales of automobile parts and so on. It’s a wholly-owned subsidiary of Company H from Hong Kong. In May 2019, Company J allocated CNY 72 million of dividends to Company H. Company H directly used the received dividends for domestic reinvestment to set up a new company, Company M, which engages in marketing activities. Company H meets the conditions for the deferral of tax payment policy and deferred the payment of CNY 7.2 million of withholding income tax as required.

In May 2020, the shareholders of Company J changed from Company H to three executives of Company J. But the shareholders of Company M remained unchanged, still Company H.

After noticing this abnormal situation, the Chinese tax bureau communicated with the Hong Kong tax bureau. According to the information provided by the Hong Kong tax bureau, Company H was deregistered and dissolved on January 3, 2021. The main body eligible for the deferral of tax payment policy had been dissolved, yet Company M continued to exist normally with no changes in registered capital and shareholders. After a thorough investigation, the tax bureau confirmed that the former legal representative of Company H and the executives of Company J actually took over the shares of Company M held by Company H through agreements. In other words, Company H had got back the investment eligible for the deferral of tax payment policy and needed to declare and pay the deferred taxes according to the provisions of Document No. 102 of the Ministry of Finance and Taxation [2018].

Faced with the evidence from the tax bureau, Company M had to cooperate. It contacted the original investors and relevant personnel in Hong Kong and finally paid CNY 7.99 million of additional taxes and late fees.

 

Dongjin notes:

Some foreign investors, in order to take advantage of the deferral of tax payment policy, invest the profits obtained from their domestic subsidiaries into newly established domestic companies. But they don’t carry out substantial business activities. After applying the deferral of tax payment policy, foreign investors transfer their shares in the profit distribution company, dissolve the foreign investment company, and finally cancel the newly established domestic investee company. Since domestic investee companies usually have no tax arrears, it’s easy for enterprises to complete cancellation through a simplified process. Some foreign investors take a chance, thinking that once the company is canceled, the tax authorities will have difficulty finding them and thus they don’t need to pay the deferred taxes. However, the Chinese tax bureau is increasingly using the tax supervision system to promptly detect abnormal business activities of enterprises and seeks assistance from foreign tax authorities. This makes it hard for foreign investors to hide their cross-border tax evasion and avoidance behaviors, and in the end, they lose more than they gain!

 

If enterprises have any questions, they are welcome to consult at any time.

 

Mike Chang

Partner

mikechang@shanghaiinvest.com