The revision of the new Company Law has triggered extensive discussions on corporate governance and shareholders' liability in the theoretical and practical circles, and the tax-related liability of individual shareholders has gradually attracted the attention of the society. For a long time, a large number of companies do not pay attention to tax-related risks due to irregular management system, and frequent fund transactions between companies and individual shareholders have occurred. With the continuous improvement of the Company Law and the Individual Income Tax Law, and the clarification of individual shareholders' responsibilities and tax liabilities, the past irregularities will gradually erupt into tax-related risks. Based on the research and practical case observation on the tax compliance of HNWIs and companies, this article provides tips on the tax risks of fund exchanges between individuals and companies for readers' reference.

I. Tax Risks and Responses of Individual Shareholders' Borrowing from the Company

According to the Circular of the Ministry of Finance and the State Administration of Taxation on Regulating the Administration of Individual Income Tax Collection of Individual Investors (Cai Shui [2003] No. 158), if a shareholder borrows money from his/her invested company during the tax year, and neither returns it nor uses it for the production and operation of the company at the end of the tax year, the borrowed money that is not returned can be regarded as a dividend distribution by the company to the shareholders, and be assessed as personal income tax under the item of interest, dividend and bonus income. interest, dividend and bonus income". Accordingly, individual shareholders borrow from the company, should distinguish between the following four situations to determine the tax obligations:

1.Individual shareholders borrow from the company for the production and operation of the company, and return it before the end of the tax year, do not need to pay personal income tax;

2.Individual shareholders who borrow money from the company, which is not used for the production and operation of the company and is returned before the end of the tax year are not required to pay individual income tax;

3.Individual shareholders who borrowed money from the company and used it for the company's production and operation and did not return it before the end of the tax year are not required to pay individual income tax;

4.If the individual shareholder borrows money from the company, which is not used for the company's production and operation, and is not returned before the end of the tax year, it is regarded as dividend and bonus income and is subject to individual income tax.

In practice, the specific application of the fourth situation has generated more controversy, specifically:

(i) Specific scope of "individual shareholders".

As Cai Shui [2003] No. 158 will be the borrower subject defined as individual shareholders, for individual shareholders of the related party from the company borrowing, in line with the fourth situation of whether the tax obligations, there are different views in practice. Some tax authorities will expand the interpretation of "shareholders" to include the shareholders' family members, for the shareholders' family members to borrow from the company, not used for the company's production and operation, in the tax year before the end of the unreturned, but also as the shareholders of the distribution of dividends and bonuses to the shareholders of the distribution of the individual income tax to the shareholders.

(ii) Definition of "after the end of the tax year".

Cai Shui [2003] No. 158 adopts the expression "after the end of the tax year" instead of "before the end of the tax year", and there are different understandings of this issue in practice, and some views believe that "after the end of the tax year" means the next tax year of the tax year in which the borrowing occurred. Some of the views are that "after the end of the tax year" refers to the next tax year of the tax year in which the borrowing occurs, therefore, according to the meaning of the article, only the shareholders who do not return the borrowing within the next tax year of the tax year in which the borrowing occurs can be taxed as if the dividends and bonuses were taxed after the end of the next tax year of the tax year in which the borrowing occurs. Some views hold that the "after" in this provision has no substantive meaning, and that as long as the shareholder does not return the loan within the tax year in which the loan is incurred, the unrepaid loan can be taxed as dividend and bonus at the end of the tax year in which the loan is incurred.

In addition, there are different interpretations of the specific scope of the tax year. Some of them are of the view that in the Individual Income Tax Law, the tax year refers to the period from 1 January to 31 December in the Gregorian calendar, and should be implemented in strict accordance with the statutory tax year. Some of the views are that the implementation in accordance with the statutory tax year will inevitably lead to unfair phenomenon, for example, if a shareholder borrows money from the company on 1 January, as long as it is returned by 31 December of that year, it does not incur a tax obligation, and it can use the funds for up to one year, and if a shareholder borrows money on 30 December, it has to be returned within one day in order to be exempted from paying tax. This point of view in the "State Administration of Taxation on the issuance of < personal income tax management measures> notice" (State Taxation [2005] No. 120) can also be confirmed, the State Taxation [2005] No. 120 provides that "to strengthen the management of individual investors to borrow from their investment enterprises, the period of more than one year and not used in the production and operation of the enterprise's borrowing, in strict accordance with the relevant provisions of the tax! "The concept of "tax year" is adjusted to "one year".

(iii) Whether the tax obligation is established if the shareholders return the borrowings after the end of the tax year

Cai Shui [2003] No. 158 did not make a clear statement on the time of the tax obligation, but in practice, it is generally believed that the first day after the end of the tax year is the date of the tax obligation. In practice, the shareholders borrowed from the company at the end of the tax year did not return, according to the law to pay personal income tax, but in the subsequent tax year and return the loan, whether such a situation can apply for tax rebates there are disputes. In addition, for the shareholders from the company borrowing after the end of the tax year did not return, did not pay personal income tax, the tax authorities did not find, in the subsequent tax year and return the loan, and then found by the tax authorities, but also make the recovery of personal income tax treatment, there are also controversies.

From the enforcement situation, the tax authorities represented by Hebei Province have issued a reply to make it clear that the individual shareholders who return the loans obtained from their investment companies for more than one year, and the individual income tax already levied in accordance with the "interest, dividend and bonus" shall be refunded or deducted from the individual income tax payable in the future. The tax authorities represented by Guangxi stipulate that the individual shareholders' individual income tax levied on inter-annual borrowings from enterprises shall not be refunded even though the borrowings have been returned after the tax has been levied, but the tax obligation of the act has already occurred. In addition, in the judicial cases, for the shareholders to borrow from the company, return in the subsequent tax year, return after the tax authorities found and back tax, the court also support the tax authorities to collect tax decision.

(iv) Whether deemed dividends and bonuses are subject to the restriction of the Company Law that no profit is to be distributed

According to the provisions of the Company Law, the company's profit is the prerequisite for dividend distribution, in other words, in the case of the company's loss, the company has no dividend to distribute, and cannot produce dividend. However, in the judicial cases, the court basically considered that whether the company has profit to distribute or not does not affect the tax authority's requirement of taxing the dividend and bonus as if it were dividend and bonus.

In summary, the author suggests that shareholders should pay particular attention to the above disputed matters when borrowing from the company, including the fact that shareholders' family members may be included in the scope of taxpayers if they fail to repay the loans, and there is a risk of being chased for personal tax, and that shareholders should try to avoid borrowing money across the year to ensure that the loans are returned in the year in which they were borrowed. In addition, if the shareholders' loans are really used for the company's procurement, project investment, etc., they should pay attention to retaining the materials that can confirm that the loans are used for the company's production and operation, such as relevant purchase and sales contracts, warehousing lists, minutes of business negotiations, travel bills, etc., so as to prove the use of the funds in the event of disputes and to avoid tax adjustments.

II. Tax-related risks and responses to shareholders' fictitious transactions with the company

When a company distributes dividends to its shareholders, it is required to withhold and pay personal income tax at a rate of 20% on behalf of the shareholders according to the income from dividends and bonuses. In order to avoid the income tax burden, some shareholders have adopted the scheme provided by the "tax planning expert" to use the flexible labour platform to sign a false contract with the company and pay the funds to the platform by means of false invoicing for fictitious transactions of spiritual labour services, which will then be transferred to the shareholders' related private accounts by way of public-to-private transfer. The logic of this scheme to achieve tax avoidance lies in:

1.At the company level, the company can avoid bearing 20% of personal income tax, and can also use the falsely accepted invoices of the services of the Lingong Platform for input deduction and pre-tax deduction, which further reduces the tax burden.

2.At the level of a spiritual worker platform, according to the tax law, spiritual worker platforms providing human resources services and labour dispatch services are subject to the tax policy of differential taxation and full invoicing, i.e., spiritual worker platforms pay VAT at a rate of 5% on the full amount of funds received, less the costs paid to the natural persons' service providers, but can issue invoices based on the full amount of funds received. As the difference obtained by the Spiritual Labour Platform is very small, it is able to issue invoices while bearing less VAT and CIT costs.

3.At the level of shareholders, Lingong Platform fictionalises the identity of the shareholders as labourers, and at the same time adopts the entrusted collection method to collect personal tax on behalf of the business income, and further communicates with the tax authorities to apply the approved collection method to calculate and collect personal tax at a lower approved taxable income rate.

As a result, under the circumstance that the spiritual platform bears very little VAT and enterprise income tax, levies very little personal income tax on behalf of the company, and the company obtains additional input tax and costs, the company achieves the purpose of avoiding the burden of 20% personal income tax and extracting funds from the company to pay to the shareholders. However, this model has greater tax-related risks:

1.Risk of being characterised as false opening as a whole

As the shareholders did not really provide labour services and the Lingong Platform did not really provide human resources services, the Lingong Platform issued service invoices to the Company without real business, which constitutes false invoicing and the Company constitutes acceptance of false invoicing. At the company level, the acceptance of false invoicing constitutes tax evasion under the Tax Administration Law, which not only requires the transfer of inputs, adjustment of income tax and payment of late fees, but also requires a fine of 0.5 to 5 times, and may also trigger the criminal liability for acceptance of false invoicing. At the level of the Spiritual Engineering Platform, external false invoicing constitutes false invoicing on the invoice management method, and is subject to the administrative liabilities of confiscation of illegal income and fines, and may also trigger criminal liabilities for false invoicing.

2.Risk of Personal Income Tax Adjustment

As the core purpose of this model is to avoid personal income tax on dividends, the tax authorities may implement tax adjustments in accordance with Article 8 of the Individual Income Tax Law and levy additional personal income tax.

3.Supplementary liability of shareholders for tax arrears of the company

According to the Judicial Interpretation (III) of the Company Law, the transfer of shareholders' capital through fictitious transactions is an act of capital evasion. If the company's net assets are very small, it may also be recognised as a shareholder's capital evasion if funds are extracted in this way. According to the Judicial Interpretation of the Company Law (III), the creditors of the company may request the shareholder who has evaded capital to bear supplementary liability for the part of the company's debts that cannot be settled within the scope of the capital interest evaded. If the company owes tax, the tax authorities, as the company's creditors, can sue to the court, requesting that the shareholders be recognised as having absconded from the capital contribution, and requesting that the shareholders who have absconded from the capital contribution be held liable for supplementary compensation for the company's tax debts.

In this regard, the author suggests that shareholders should distribute profits from the company in accordance with the law, and should not trust the so-called "tax planning experts", as the fictitious transactions will not only fail to save tax, but also lead to administrative and criminal liabilities, which will ultimately lead to more losses than gains.

III. Tax-related risks and responses to shareholders' personal consumption expensed by the company

The Enterprise Income Tax Law stipulates that reasonable expenditures actually incurred by the company in relation to the income obtained shall be allowed to be expensed before tax, and expenditures not related to the income shall not be deducted when calculating the taxable income. In other words, personal consumption and family consumption not related to the company's production and operation are not allowed to be listed in the company. However, in practice, there are a large number of cases of tax administrative penalties, which show that shareholders do not distinguish between personal and family consumption and the company's production and operation expenditures, and reimburse personal consumption expenditures in the company under their control and deduct them before tax. This kind of behaviour is the false costing behaviour stipulated in Article 63 of the Tax Collection and Management Law, and the company constitutes tax evasion, and at the same time meets the provisions of Cai Shui [2003] No. 158, which states that "using the enterprise's funds to pay for the consumption expenditures not related to the enterprise's production and operation, and the purchase of automobiles, housing, and other property expenditures for the person himself, his family members, and the related personnel, shall be regarded as the enterprise's distribution of dividends to the personal investors, and shall be taxed as the dividends of individual investors. Dividend distribution, personal income tax", the company also bears the responsibility of not withholding personal income tax, shareholders face the risk of personal income tax recovery, and in serious cases may also be suspected of misappropriation of functions and other related offences.

In addition, the company to bear the shareholders personal consumption expenditure, may be identified as the company, the shareholders property mix, and then trigger the risk of denial of legal personality. According to the Company Law, if the shareholders abuse the independent status of the company and the limited liability of the shareholders, and seriously infringe the interests of the creditors, the creditors may request the shareholders to bear joint and several liability for the debts of the company. If the company owes tax, and often use the company's funds for shareholders' personal consumption, the tax authorities, as tax creditors, may sue the shareholders for joint and several liability for the company's tax debts.

In this regard, the author suggests that shareholders should improve corporate governance and tax compliance awareness, strict distinction between shareholders' personal and corporate boundaries, and must not treat the company as "private property", reimbursement of personal consumption arbitrarily to extract company profits, and damage the national tax interests.