China's personal tax policy on investment in non-monetary assets has gone through an evolutionary process from "no levy" to "one-time payment" to "payment by installments", and the focus of the policy has also changed from "lack of taxable cash" to "preventing national tax loss" to "guiding private investment". The focus of the policy has also transitioned from "lack of personal taxable cash" to "preventing national tax loss" to "guiding private investment". As the economic activities of individual investors investing in equity, real estate, technical inventions and other forms of non-monetary assets become more and more widespread, coupled with the long process of fulfilling the investment agreement, there are numerous tax disputes on the point of time and standard for recognizing the transfer income. Especially under the current non-monetary assets investment tax policy, individual investors face three major tax risks that need to be prevented.

I. non-monetary asset investment did not obtain all the equity transfer consideration, application for tax rebate was rejected

(I) History of non-monetary asset investment tax policy

Combined with the enterprise income tax and individual income tax related policy documents, non-monetary assets refer to assets other than cash, bank deposits, accounts receivable, notes receivable and bond investments ready to be held to maturity, which are mainly manifested in the form of equity, real estate, technological inventions and other forms. As China's capital market is improving, corporate mergers and reorganizations, capital increase, directional issue tend to be frequent, individuals directly invest in non-monetary assets are not uncommon. Along with the great abundance of transaction forms and endless tax avoidance operations, China's relevant personal tax policies have gone through a series of changes.

(II) Viewpoint of the actual case: Recognition of income based on the agreed consideration and payment of personal income tax

1. Introduction of the case

On June 1, 2016, Dalian Tian Shen Company purchased 76.36% of the shares of Hurun Media Company held in aggregate by the plaintiff and other shareholders, of which 31.7% was held by the plaintiff, at a transaction price of RMB 257 million, and agreed to pay the plaintiff RMB 108 million equivalent to 1,528,000 shares in the form of issuance of shares, and RMB 149 million in cash to the plaintiff. million yuan.In 2017, the transferred shares of Hurun Media Company were registered and transferred to the name of Dalian Tian Shen Company, and on March 20 of the same year, the equity transfer consideration was registered to the name of the plaintiff.On February 1, 2018, the plaintiff declared the individual income tax to the third tax office in relation to the equity transfer transaction, and actually paid a tax of 51,116,000 yuan.In 2018, Tian Shen Entertainment Company actually paid a total of cash consideration to the plaintiff of 714,700 yuan. on July 15, 2019, the plaintiff entered into the "Claims Assignment and Claims and Liabilities Offset Agreement" with Hurun Media Company and Dalian Tian Shen Company, which stipulated that Hurun Media Company would offset the claims of 350,035,000 yuan against other companies against the cash consideration not paid by Dalian Tian Shen Company to the plaintiff in the Agreement, and that after offset, Dalian Tian Shen Company owed 42,580,000 yuan of the cash consideration to the plaintiff On February 4, 2021, the Plaintiff applied for a refund of the overpaid tax of RMB 7.15 million on the grounds that it had not received the cash consideration of RMB 35.76 million due to the offsetting agreement and the implementation of the reorganization plan.

2.the court's view

According to Circular No. 41 of Cai Shui [2015], the taxable income from investment in non-monetary assets is based on the recognition of income from the transfer of non-monetary assets based on the fair value of the asset appraisal at the point of transfer of non-monetary assets and acquisition of equity interest in the investee enterprise, less the original value of the asset and reasonable taxes and fees. Neither the signing of the set-off agreement nor the execution of the reorganization plan had an impact on the equity transfer income. Even if the plaintiff considered that the actual economic benefits recovered were reduced, it was a separate agreement based on the corresponding economic purpose after the plaintiff's tax liability arose, which did not affect the transaction price recognized by both parties in the investment in non-monetary assets, and thus did not affect the plaintiff's recognition of income based on the transaction price and payment of individual income tax.

II. Point of time of realization of income from investment in non-monetary assets and tax refund rules

(I) Realization point of income from transfer of non-monetary assets and recognition rules

According to the provisions of the current normative legal documents on the realization of income from the transfer of non-monetary assets investment, an individual investing in non-monetary assets shall recognize the realization of income from the transfer of non-monetary assets at the time of transfer of non-monetary assets and acquisition of equity interest in the invested enterprise. It can be seen that individuals should recognize the realization of income from transfer of non-monetary assets to meet the two conditions of transfer of non-monetary assets and acquisition of equity interest in the investee enterprise by investors at the same time. Although this provision provides clear standards and predictable guidelines for taxpayers to carry out the tax activities of investment in non-monetary assets, it confuses the point of time between the acquisition of equity interest in the investee enterprise and the realization of income from the transfer of assets.

On the one hand, "transfer of non-monetary assets" involves the point of time when the investor and the investee sign the transfer agreement, the point of time when the investor actually delivers the non-monetary assets to the investee, and the point of time when the investor registers the property rights to the investee according to the law. " involves both the point when the investor is recorded in the register of shareholders and can exercise the rights of shareholders and the point when the investee enterprise registers the equity interest for the investor. Since Circular No. 41 of Cai Shui [2015] does not specify which of the above points of time is to be chosen as the point of time for recognizing the realization of revenue, this ambiguity of definition is prone to cause tax disputes in practice. In company law, the "transfer of non-monetary assets" is a way for investors to fulfill their capital contribution obligations, and investors should satisfy that the non-monetary assets have been delivered to the company for use and the procedures for changing the corresponding ownership have been completed. Since obtaining the qualification of shareholders and enjoying the equity does not necessarily take the invested enterprise for equity registration procedures as a prerequisite, it is difficult to determine when the investor "obtains the equity of the invested enterprise". In contrast, the Circular of the Ministry of Finance and the State Administration of Taxation on the Issues of Enterprise Income Tax Policies for Investment in Non-Monetary Assets (Cai Shui [2014] No. 116) specifies that the point of time for enterprises to make investment in non-monetary assets and recognize the transfer income is when the investment agreement comes into effect and when the equity registration procedures are carried out, so as to strengthen the psychological expectation of the investors to pay taxes, reduce the subjective assumptions of the tax authorities, and reduce the risk of law enforcement. Therefore, when individuals invest in non-monetary assets, the point of time for recognizing transfer income shall be further clarified on the basis of considering the effective connection with other laws.

On the other hand, the recognition of income realization at the time of "transfer of non-monetary assets and acquisition of equity interest in the investee" ignores the consideration of whether the income has been realized or not, which is contrary to the principle of taxability and the principle of tax neutrality. From the viewpoint of tax law principle, the acquisition of income should satisfy the two conditions of "existence of asset gain" and "income has been realized", i.e., the net increase of assets with the possibility of execution. Due to the investment of non-monetary assets, the income obtained by the taxpayer is still non-monetary assets (shares), in accordance with Article 8 of the Regulations for the Implementation of the Individual Income Tax Law, if the income is in the form of securities, the taxable income shall be determined based on the face value and market price, and the point of time for the assessment of the face value and the market price shall have a significant impact on the recognition of the transfer of income by the investor. For one thing, if the investor is taxed at the time of "acquisition of equity interest in the investee enterprise", the investor has not yet recovered the investment or transferred or liquidated the equity interest, and does not have substantial gains at its disposal, and has to use its own funds other than the investment gain to fulfill the tax obligation, and once the investor lacks sufficient funds to pay the tax, the relevant non-monetary asset Once the investor lacks sufficient funds to pay the tax, the relevant non-monetary assets will inevitably be aborted, and the investor may give up such investment transactions in consideration of such circumstances. The principle of tax neutrality is violated when taxes have a decisive impact on economic activities. Secondly, when an investor acquires an equity interest in an investee enterprise, the economic benefits brought to the investor by the equity interest are expectant rather than vested benefits, and there is uncertainty as to whether or not they will receive any income and how much they will receive. The tax on investment in non-monetary assets is actually a tax on the potential value-added portion of the investment behavior that may be realized, and the substantial value of this portion is affected by market fluctuations, and the income from the transfer of investment in non-monetary assets can be specifically determined only when the equity is realized or transformed into other disposable forms of income. Therefore, when an investor makes an investment in non-monetary assets, the point at which the investor recovers the investment, transfers or liquidates the equity interest should be taken as the point at which the transfer income is recognized in accordance with the requirements of the income realization principle.

In addition, in order to safeguard tax equity and balance the tax burden, investments in asset items of different subject status and nature should be subject to the same conditions, restrictions and policy measures as to the point of time for revenue recognition.

(II) Unrealized income from the transfer of non-monetary assets subject to tax refund

Article 51 of China's Tax Collection and Administration Law: "Taxpayers paying taxes in excess of the taxable amount shall be refunded immediately upon discovery by the tax authorities; taxpayers discovering within three years from the date of settlement of tax payment may request from the tax authorities a refund of the overpayment of taxes and the addition of interest on deposits made during the same period of time in the bank, which shall be refunded immediately upon timely investigation and verification by the tax authorities; and the tax shall be refunded immediately when it involves a return of the tax from the treasury; it shall be refunded in accordance with the laws and administrative regulations on treasury management. If it is to be refunded from the state treasury, it shall be refunded in accordance with the provisions of laws and administrative regulations concerning the management of the state treasury." and Article 78 of the Implementing Rules of the Tax Collection and Administration Law: "Where a tax authority finds that a taxpayer has overpaid tax, it shall handle the refund procedures within 10 days from the date of discovery; where a taxpayer finds that he/she has overpaid tax and asks for a refund, the tax authority shall find out the facts and handle the refund procedures within 30 days from the date of receipt of the taxpayer's application for refund. Article 51 of the Tax Administration Law provides for the refund of overpayment of tax by adding the interest on bank deposits for the same period, excluding the settlement refund, export tax refund and various tax reductions and exemptions in accordance with the law on the prepayment of tax. The interest on tax refund shall be calculated in accordance with the interest rate on demand deposits stipulated by the People's Bank of China on the day when the tax authorities handle the tax refund procedures." Provisions are made for tax refunds.

It can be seen that, whether the tax authorities found, or taxpayers found, the premise of the tax refund is "overpayment of tax", that is, with the tax paid minus the "taxable amount" is still remaining. If discovered within the statutory period, the refund should be made. When both parties to a non-monetary asset investment transaction have completed the registration and transfer procedures for the transfer of equity, but when the investor declares the payment of individual income tax based on the transaction price agreed in the Agreement, the investee enterprise has not yet paid the remaining cash consideration, and has not fully performed the Agreement, and the investor has not yet obtained the agreed full income. If, after the registration of the change in equity, the parties to the transaction agree to reduce the transfer price, or terminate the performance of the contract and recover the transferred equity, it shall be deemed that the act of equity transfer has not been completed and the income has not been fully realized. Since the equity transfer relationship is changed or eliminated due to the change or termination of the agreement, the existence and amount of the income from the transfer of equity also change, the investor does not obtain the income or obtains a reduction in the income, the amount of tax payable will be reduced accordingly, and the investor will find that he has overpaid the tax, and there is nothing improper in applying for a tax refund. If the tax authority finds out that the income from investment in non-monetary assets has not been realized, the tax refund shall be granted.

III. Tax-related Risks of Non-Monetary Asset Investment and Preventive Measures

(I) Tips on Tax-Related Risks of Non-Monetary Asset Investment

1. The investor transfers the equity and completes the registration and transfer procedures, even if it does not obtain the income, it also has the tax obligation.

According to the provisions of Article 2 of Circular No. 41 of Cai Shui [2015], the point of time for recognizing the income from the transfer of non-monetary assets is not shifted by whether the income is obtained or not. Furthermore, the Administrative Measures for Individual Income Tax on Income from Equity Transfer (for Trial Implementation) has also made it clear that if the equity transfer agreement has been signed and entered into force, the taxpayer shall declare tax to the competent tax authorities within 15 days of the following month according to the law, and it does not matter whether it obtains income or not.

2. When the transfer agreement is completed and the agreement is canceled to recover the equity, the tax imposed will not be refunded.

According to the "State Administration of Taxation on the taxpayer to recover the transfer of equity to collect individual income tax issues of the Reply" (State Taxation Letter [2005] No. 130) Article 1, the completion of the equity transfer contract, the equity has been registered as a change, and the proceeds have been realized, the transferor to obtain the transfer of equity income should be paid in accordance with the law of individual income tax. After the end of the transfer behavior, the parties sign and implement the termination of the original equity transfer contract, the return of equity agreement, belongs to another equity transfer behavior, the implementation of the original equity transfer contract of the transfer of personal income tax levied by the transfer of behavior will not be refunded.

3.Deferred five-year installment tax payment is subject to the condition of "difficulties in one-time tax payment".

Individual income tax does not exist similar to the provisions of the enterprise income tax loss compensation, and in the non-monetary asset investment, "Ministry of Finance State Administration of Taxation on the non-monetary asset investment enterprise income tax policy issues notice" (Cai Shui [2014] No. 116) for the enterprise to obtain the transfer of non-monetary assets, in five years to pay in installments is not subject to the conditions of restriction, but for the individual shareholders, the deferral of five-year installments However, for individual shareholders, the deferral of tax payment for five years shall be subject to the existence of difficulties in one-off tax payment and the corresponding tax payment plan shall be filed with the competent tax authorities.

(II) Tax-related risk prevention for investment in non-monetary assets

1. Timely and full declaration and payment of taxes

The investor carries out non-monetary asset investment transactions, which involves the transfer of non-monetary assets and investment in two tax-related links, respectively, resulting in different tax obligations. In order to prevent tax risks, both the investor and the investee enterprise should pay the corresponding taxes in full according to the legal deadline. Under the current tax policy, individuals investing in non-monetary assets can defer tax except for investment in technical achievements, and the lack of special tax treatment provisions may bring greater tax pressure to taxpayers. Individuals should fully assess the potential value-addedness of the invested enterprise, the cost of investment capital, the level of tax burden and other factors before the transaction, so as to ensure that the transaction is lawful and compliant.

2.Tracking the whole transaction, overpayment of tax for tax rebate

As mentioned above, once the equity transfer contract is completed, the equity has been registered as a change, and the income has been realized, the investor should pay personal income tax on the income according to law. Among them, "the completion of the equity transfer contract" shall be the transferee to the transferor to pay all the equity transfer, the investor to the transferee of the payment of the existence of objections, should actively communicate with the tax authorities, to fully explain that the transferee did not fully fulfill the equity transfer contract, the reasons for overpayment of tax, for tax rebates.

3.Accurate application of installment payment to avoid the risk of tax evasion

Individuals making investment transactions in non-monetary assets face the pressure of one-time payment of tax liability cash flow, which may result in the investment purpose not being realized. Therefore, the investor should fully prove that it is difficult to pay the tax at one time, and strive to apply the preferential treatment of paying the tax in installments. If taxpayers can pay individual income tax in installments, they should submit relevant information to the competent authorities for filing and allocate the planned payment amount according to the filing period, and follow up whether the relevant tax is paid in full in a timely manner, so as to prevent administrative and criminal risks arising from the non-payment or underpayment of tax.

IV. Summary

The personal tax policy on investment in non-monetary assets has certain ambiguities regarding the point of time for recognizing income from the transfer of equity, and the provision itself is not in line with the principle of "income realization", which may easily lead to the lack of funds for taxpayers to pay taxes. However, under the current regulations, taxpayers should declare and pay tax in full and on time for non-monetary asset investment, and if there is any overpayment of tax, they should actively communicate with the tax authorities and strive for tax refund.