I. Formulation of the question: Does an investment in shares constitute a "transfer for consideration"?

(I) Case introduction

Company A wants to hold intangible assets to invest in company B, the evaluation of intangible assets valued at 30 million yuan, company B using the directional issue of new shares to company A, after the completion of the capital increase, company A holds the equity of company B, the book value of 30 million yuan, the transaction is no cash payment. Then, whether the behavior of Company A to intangible assets for the price of investment in shares generates value-added tax obligations?

(II) Different views on the VAT treatment of intangible assets at the price of investment in shares

1、It belongs to the sale of intangible assets and is treated according to the general provisions.

One viewpoint is that Company A's investment in shares with intangible assets belongs to the "sale" of intangible assets as stipulated in the Provisional Regulations on Value-added Tax, and belongs to the scope of value-added tax, the reason is that: on the one hand, the ownership of the intangible assets after the investment in shares is transferred from Company A to Company B. On the other hand, Company A obtains the equity interest of Company B, that is, Company A obtains the "sales" of intangible assets other than money and goods. On the other hand, the acquisition of equity interest by Company A in Company B is the acquisition of "other economic benefits" other than money and goods, which constitutes the paid transfer of intangible assets as defined in the tax law, and Company A should recognize the sales amount of the value of the equity interest acquired by Company A, calculate the amount of output tax, and fulfill the VAT tax obligation. This point of view is also consistent with the State Administration of Taxation's "Reform and Increase" policy solution.

2、Transferring intangible assets without compensation and treating them as deemed sales

Another viewpoint is that Company A's investment in intangible assets to obtain the same value of equity, should be defined as gratuitous transfer of intangible assets, applicable to the provisions of the deemed sale of tax. The basis for this assertion can be found in the Implementing Rules of the Provisional Regulations on Value-added Tax. According to Article 4 of the Implementing Rules, "providing self-produced, commissioned-processed or purchased goods as investment to other units or individual industrial and commercial tenants" shall be regarded as deemed sale of goods. Based on the consistency of the internal system of the tax law, the investment in goods and intangible assets should be subject to uniform tax rules, therefore, the behavior of Company A providing its self-produced intangible assets as investment to Company B should also be characterized as gratuitous transfer of intangible assets from units to other units with reference to the relevant provisions on investment in goods into shares, and the provisions on deemed sale should be applied, and the competent tax authorities should, in accordance with the provisions of No. 36 of the Cai Shui [2016] Article 44 of the document, in order to determine the sales.

3、does not belong to the transfer of intangible assets, do not need to pay taxes

There is also a view that should be denied to invest in shares of the "compensated" and "transfer", investment and transfer are two completely different legal acts, regardless of whether the transfer of compensated or uncompensated transfer, its landing point is still transfer, can not cover the investment. Based on the perspective of civil and commercial law, investment in intangible assets does not constitute "exchanging assets for equity", but rather injecting assets into the target company to "create equity". In other words, the acquisition of equity by Company A is a legal consequence of the investment behavior, rather than an asset swap transaction reached by consensus between the two parties in a fair market environment. Based on the perspective of tax law, in the whole investment process, Company A only obtained the equity of the same value, and did not obtain additional economic benefits, i.e., the value-added of the intangible assets was not realized through the flow of assets, and the object of value-added tax did not exist. Based on the current legislation, Cai Shui [2016] No. 36, Notes on the Sale of Services, Intangible Assets and Real Estate (hereinafter referred to as the Notes), states that the sale of intangible assets refers to the business activity of transferring the ownership of intangible assets or the right to use them. From this, the "Notes" will only be defined as the transfer of sales, and did not "intangible assets investment in shares" into the "sales" of the scope. Although investment and transfer are accompanied by the transfer of ownership of assets, but "investment" and "transfer" can not be the same understanding. Therefore, investments in intangible assets are not subject to VAT.

(III) Summary: The controversy centers on whether the investment in shares constitutes a "transfer for consideration" under the tax law.

The difference of the above views lies in whether "investment in shares" and "transfer for consideration" in tax law can be understood in the same way, and the conclusion of this issue will directly affect the taxpayer's tax obligations or not.

II. from business tax to value-added tax: intangible assets investment in shares of the tax policy changes

(I) Business tax period: intangible assets investment in shares is generally not subject to business tax

During the business tax period, the transfer of intangible assets belongs to the taxable behavior of business tax, but there are special provisions for the investment of intangible assets, mainly around whether the owner of the intangible assets to bear the risk of investment, to determine whether the investment behavior should be subject to business tax:

1、If the owner of intangible assets invests in shares with intangible assets, participates in the profit distribution of the investing party and bears the investment risk together, according to the Notice of the Ministry of Finance and State Administration of Taxation on the Business Tax Issues Relating to the Transfer of Equity Interests (Cai Shui [2002] No. 191), its investment and the transfer of its equity interests after the investment shall not be subject to business tax.
2、If the owner of intangible assets invests in shares with intangible assets, does not bear the business risks of the invested company, and only obtains fixed income, the behavior is essentially detached from the category of "investment in shares", and should be recognized as "Reply of the State Administration of Taxation on the Issues of Business Tax on Fixed Profits Collected from Investments in Shares of Immovable Property or Intangible Assets" (State Taxation Letter Fa [1997] No. 191). State Taxation Letter [1997] No. 490) of the "transfer of intangible assets" behavior, the collection of business tax.

As a matter of fact, the tax provision stipulated in Guo Shui Fan Fa [1997] No. 490 is essentially a kind of anti-avoidance tax. Because intangible assets investment in shares, where the acquisition of ordinary shares, the investor is bound to bear the investment risk. Such as investors through the acquisition of preferred shares, etc., to obtain capital preservation, fixed income, in the value-added tax will be characterized as fixed-income bonds, the application of "loan services" of the relevant rules of taxation. Therefore, the State Taxation Letter [1997] No. 490 is aimed at the tax avoidance behavior "in the name of investing in shares and performing the practice of licensing", not the general situation discussed in this article.

(II) After "Reform and Increase": the taxability of investment in intangible assets is not clear.

After the "Camp Reform and Increase", the tax law does not clearly stipulate the taxability of intangible assets investment in shares, and it can only be concluded from the general provisions on the scope of taxation. According to Article 1 of the Measures for the Implementation of the Pilot Measures for the Conversion of Business Tax to Value-added Tax in Annex I of the Circular of the Ministry of Finance and the State Administration of Taxation on the Comprehensive Launch of the Pilot Measures for the Conversion of Business Tax to Value-added Tax (Cai Shui [2016] No. 36), the "sale" of intangible assets has been changed from the levy of business tax to value-added tax. Articles 10 and 11 further clarify that the so-called "sale" means "transfer with compensation", and "with compensation" refers to the acquisition of money, goods or other economic benefits. According to the Notes on Sales of Services, Intangible Assets and Real Estate, assets that are not in physical form but can bring economic benefits are intangible assets, including technologies, trademarks, copyrights, goodwill, natural resource use rights and other equity intangible assets. Among them, in conjunction with Annex III, Provisions on Transitional Policies for the Pilot Program of Changing Business Tax to Value-added Tax, taxpayers can be exempted from VAT if they provide qualified technology transfers.

In addition, it should be noted that the Implementing Rules of the Provisional Regulations on Value-added Tax have not been amended in parallel after the change of business tax, and the version amended in 2011 is still in use. As mentioned above, in the Implementing Rules, the investment of goods into shares is taxed according to the rule of deemed sale.

(III) Official Answer of the State Administration of Taxation (SAT): Intangible Asset Investment in Shares is a Paid Transfer of Intangible Assets to Obtain Other Economic Benefits

On May 12, 2016, the State Administration of Taxation ("SAT") provided a clear answer to the question of "whether value-added tax ("VAT") should be levied on the investment of immovable property and intangible assets into shares" after the "change of tax rate". A spokesman for the General Administration pointed out that "the implementation measures for the change in tax regime clearly stipulate the concept of selling real estate and intangible assets, i.e. transferring them for a fee. The concept of paid includes the acquisition of money, goods and other economic benefits. It is the same concept as that of being paid under the VAT regulations. This basic provision actually solves the problem of whether investment in shares with immovable property and intangible assets is taxable. There must be a transfer of ownership, and at the same time, the acquisition of equity is the acquisition of economic benefits", and "(the basis of taxation) is obviously the value of the equity acquired".

Regarding the investment in goods into the shares of the applicable provisions of the deemed sale of tax, while the investment in intangible assets is directly characterized as a paid transfer of the difference in accordance with the general provisions of the tax. The spokesman of the General Administration also made a response: "It takes a process to recognize the VAT tax system. The original VAT regulations were formed in 1994, and now there are still some areas that need to be amended. This issue is one of them. The old VAT regulations actually made a principled statement on the 'paid' transfer of ownership of goods, including the acquisition of money, goods and other economic benefits. In fact, the concept of 'for consideration' already covers the issue of taxation of investment in goods into shares, and the acquisition of equity is the acquisition of economic benefits. Since this problem is recognized, the issue of investment in shares of immovable property and intangible assets is not separately clarified in the process of drafting the implementation measures this time". Therefore, investment in shares at the price of intangible assets should be treated as sales and subject to VAT.

(IV) Summary: According to the official caliber, investment in intangible assets should be taxed in principle, but qualified technology shares can be exempted from tax.

To summarize, based on the current effective tax law and the official reply of the State Administration of Taxation, the investment in shares of intangible assets still belongs to paid transfer, and the node of "intangible assets" should be used to classify the technical intangible assets and non-technical intangible assets. Investment in shares with technical intangible assets, which meets the conditions, can be compared with "technology transfer" and enjoy the VAT exemption benefits by the taxpayers fulfilling the filing procedures according to the law. The non-technical intangible assets investment in shares is in accordance with the general provisions of the taxpayer to obtain the value of the equity for the tax basis, the value-added tax obligations.

III. the legal analysis of the value-added taxability of intangible assets investment in shares

(I) The irrationality of VAT on intangible assets investment in shares from the difference between transfer and investment

China's tax law does not clarify the relationship between "investment" and "transfer". In fact, investment is not necessarily equivalent to transfer:

For one thing, the transfer of intangible assets refers to the act of transferring the exclusive right or license right of intangible assets to the other party according to the legal or de facto disposition authority of the actor, which is a kind of transaction carried out by consensus of the parties under the link of the free market, and it is a two-party legal act in terms of legal attributes. The intangible assets investment in shares is the intangible assets into the subject company, the form of assets into equity behavior. The investment behavior does not occur between the investor and the subject company, but the investor and the original shareholders to reach a consensus, the implementation of the legal act. That is, the basic legal relationship is not established in the intangible asset ownership of the transfer of the party and the transferee, the investor and the company has no equal market status, according to the number of shareholders to accept investment in the company may involve a number of subjects, intangible asset investment in the legal attributes of a multi-party legal behavior.

Secondly, Article 32 of China's "Science and Technology Progress Law" differentiates between "transfer to others" and "investment at a price", which also shows that the legislation does not distinguish between "investment" and "transfer". It can also be seen that the legislation does not interpret "investment" and "transfer" in the same way. The transfer of intangible assets is firstly regulated by other sectoral laws, such as the Law on Scientific and Technological Progress, and the relevant concepts used in its tax policy should fully respect other sectoral laws, so that it cannot arbitrarily change the connotation and extension of the basic legal concepts of investment and transfer, and cannot collectively refer to the act of transfer of ownership as transfer.

Thirdly, as mentioned above, it is not possible to interpret Articles 10 and 11 of the Measures for the Implementation of the Pilot Measures for Changing Business Tax to Value-added Tax in Annex I of Cai Shui [2016] No. 36 in a literal sense to include "investment" in the category of "transfer with compensation".

In summary, given the difference between investment and transfer and the loopholes in the existing legislation, it is not reasonable to recognize "investment in shares of intangible assets" as "transfer of intangible assets" for the purpose of levying VAT.

(II) Irrationality of VAT levied on investment in shares of intangible assets from the perspective of business tax policy

As mentioned above, during the business tax period, the tax obligation of investment in intangible assets at the price of shares was differentiated: the tax obligation of the owner of the intangible assets depended on whether he/she assumed the business risk of the investor.

After the "Camp Reform and Increase", it is unreasonable to include the investment of intangible assets into the VAT taxable behavior. At present, Cai Shui [2002] No. 191, which specifies that the owner of intangible assets shall not levy business tax on the act of investing intangible assets at the price of shares and bearing the risk of investment, is still an effective normative document, and it still undertakes the function of interpreting the tax law and refining the basis of tax collection and management. As the transitional policy of "business tax reform", Cai Shui [2016] No. 36, the new provisions do not specify the tax obligation of intangible assets investment and stock purchase, and the new law does not replace the old law. Business tax policy and value-added tax policy, although belonging to different taxes, but combined with the "camp to increase" policy background, the two tax on intangible assets part of the tax is essentially the same, he intangible assets investment in the shares are not levied business tax, and now should not be levied value-added tax.

(III) Summary: VAT on intangible assets investment should be treated differently with reference to business tax policy.

Comprehensively, the VAT taxability of intangible assets investment in shares should be treated differently with reference to the business tax policy: i.e., for the intangible assets owner who participates in profit distribution of the invested party and bears the investment risk together, no VAT shall be levied, and for the intangible assets owner who does not bear the business risk of the invested company and only obtains fixed income, VAT shall be levied in accordance with the law in respect of the loan service. On the one hand, this is a reduction of the principle of value-added tax, on the other hand, this system design reduces the tax cost to be borne by the intangible assets developers in the process of obtaining returns, which is conducive to promoting the investment in intangible assets and mobilizing the enthusiasm of research and development of intangible assets, and echoing with the strategy of "Science and Technology Stronger Nation" of the country.

IV. Prevention and Response to the VAT Risks of Intangible Asset Investment in Shares

Taxpayers should pay attention to the tax-related risks in the implementation of intangible asset investment and stock-in-trade behavior, improve the awareness of tax-related risk prevention, and cultivate the risk avoidance and response ability throughout the whole process of pre-event, event, and post-event.

(I) Tax factors should be considered when formulating investment programs

Taxpayers should sort out and analyze their own tax-related matters when formulating the intangible assets investment and shareholding plan, and should not only judge in advance whether the behavior is in compliance with the provisions of the tax law, but also confirm whether the legal documents based on it have been revised or repealed, and dig deeper into the types of taxes involved and estimate the corresponding tax burden, and choose whether to implement the investment and implement the optimal investment plan on this basis.

(II) Adequate Due Diligence and Tax Burden Estimation

The company receiving the investment should conduct sufficient due diligence on the intangible assets to be acquired, to understand whether there are any legal disputes over the ownership of the intangible assets, whether the appraisal price is an overestimation or underestimation of the asset value, and whether it is fulfilling the review, approval or filing procedures required for the transfer of capital contributions, etc. Accordingly, the company receiving the investment should conduct sufficient due diligence on the intangible assets. Correspondingly, the company receiving the investment should also conduct tax burden estimation in accordance with the current effective tax law, and accordingly carry out negotiation and negotiation with the owner of the intangible assets.

(II) Engaging professional tax lawyers

The parties can hire tax lawyers at various stages of the investment. At the stage of investment program development, tax lawyers can give investment program with their professionalism, prompt and amend the risk points in the existing investment program, so as to guarantee the parties to promote the smooth implementation of the investment program with the smallest possible tax burden. Once the tax risk has been transformed into the reality of liability, tax lawyers can intervene in the tax case, fully communicate with the tax authorities, and protect the legitimate rights and interests of the taxpayers through the way of statement and defense.