Editor's Note: The revised "Company Law" has introduced new legal liabilities for shareholders, leading more shareholders to avoid legal risks through capital reduction, share transfers, company liquidation, and other means. However, this may also trigger a series of tax-related risks for shareholders. Moreover, the revision of the "Company Law" has sparked a lively discussion in society on issues such as corporate governance. Many companies have long-standing flaws in their business and financial operations, such as close or even commingled financial transactions between shareholders and the company, which also hide serious tax risks. In the new era of the Company Law, how shareholders can manage tax compliance in advance and properly guard against tax risks has become an inescapable topic. This article will combine actual cases to analyze how to help shareholders prevent tax risks through special tax consulting, tax health checks, self-examinations, and responses to tax audits.

I. Case Analysis of Special Tax Consultation for Price Change in Share Transfers and Application for Tax Refunds

(I) Case Summary

In 2016, Company A signed a "Performance Compensation Agreement" with the shareholders of Company B, agreeing that Company A would acquire a total of 62% of the shares held by Hu and others in Company B. Hu and others promised the net profits of Company B for the years 2016-2018. If Company B failed to meet the target, Hu and others would need to compensate for the shortfall in profits. In 2019, during the liquidation, it was found that the total net profit of Company B from 2016 to 2018 was a negative of more than 50 million yuan, failing to meet the agreed profit. Hu and others needed to compensate for the performance, amounting to about 200 million yuan. Since Hu and others had already paid personal income tax on the share transfer in 2016, they hoped to apply for a tax refund from the tax authorities after paying the performance compensation and contacted a lawyer to assist with this matter.

(II) Main Risk Points

1. Some tax authorities believe that receiving cash compensation is unrelated to the share transfer and cannot adjust the share transfer price.

2. There is no clear policy supporting the tax refund application for performance agreements, making the actual execution of tax refunds quite difficult.

(III) Risk Prevention Path

After the lawyer's intervention, a "Consultation Opinion" was written for Hu and others, analyzing the matter of the tax refund application:

From the perspective of civil law, the "Minutes of the National Court's Civil and Commercial Trial Work Conference" (referred to as the "Nine Civil Minutes") defined the "performance agreement" as an agreement designed to address the uncertainty of the future development of the company, information asymmetry, and agency costs between the parties in a share financing agreement. It pointed out that the agreement usually includes clauses such as share repurchase and monetary compensation to adjust the valuation of the target company in the future. From the perspective of literal interpretation, the "Nine Civil Minutes" indicates that the performance agreement should be regarded as a single overall transaction, not two separate transactions, and the subsequent repurchase or compensation actions are adjustments to the initial transaction valuation.

From the perspective of tax law, the definition of legal relationships in tax law is based on civil and commercial law, and in principle, it should respect, recognize, and inherit the legal relationships and facts already determined by civil and commercial law. Unless there are exceptional provisions, the legal relationships recognized by civil and commercial law cannot be arbitrarily changed. According to the economic compensation paid for the performance agreement, civil law has already recognized it as an adjustment to the share transfer price, and tax law should also handle it accordingly.

From the basic principles of tax law, according to the principle of tax neutrality, tax law should avoid unnecessary intervention in the economic behavior of market entities. Tax policies should be as neutral as possible, which means that tax law should consider the economic substance intended by the parties in the transaction when designing and implementing, ensuring the fairness and efficiency of taxation. The economic compensation paid according to the performance agreement is essentially to adjust the share transfer price, and there is no separation into two transactions. Tax law should not over-intervene, violate the essence of the transaction, and increase the tax burden on market entities, causing obstacles to market transactions.

In practice, some tax authorities also recognize this view. For example, the Hainan Provincial Local Taxation Bureau's "Reply on the Issues of Corporate Income Tax Related to Profit Compensation in Performance Agreements" (Qiong Local Tax Letter [2014] No. 198) issued in May 2014 states, "The profit compensation obtained in this performance agreement can be regarded as an adjustment to the initial pricing of the acquired shares, i.e., adjusting the initial investment cost of the corresponding long-term equity investment in the year of receiving the profit compensation." It can be seen that the Hainan Provincial Tax Bureau considers the profit compensation as an adjustment to the share transfer pricing. It can be inferred that the share transfer with a performance agreement is essentially a civil legal act with conditions attached. The share transfer price was not determined at the time of signing the equity agreement, and only when the conditions for the performance agreement are met or not met can the share transfer price be finally determined. That is, the share transfer price paid earlier does not belong to a definite tax basis, and only when the relevant conditions occur can the tax basis be clarified, and the tax obligation can be finally determined. To protect the national tax interests, if taxes have been levied on an uncertain tax basis earlier, they should naturally be re-determined when the tax basis is determined later, and taxes should be supplemented or refunded according to the actual situation.

(IV) Case Insights

In practice, there is a significant difficulty in applying for a tax refund from the tax authorities due to changes in share prices caused by performance transactions. Therefore, shareholders should communicate with the local tax authorities in advance before engaging in performance transactions and clarify the tax declaration of share transactions. If the tax authorities approve the application of the advance ruling mechanism, the advance ruling mechanism can be used to clarify the tax treatment of the transaction arrangement.

In addition, during the process of applying for a tax refund, if the tax authorities refuse to handle it, shareholders should fully argue the performance transaction and explain the legality and justification for applying for a tax refund, citing cases in practice where tax bureaus have supported shareholders in applying for tax refunds, to support their own views.

II. Case Analysis of Special Tax Health Check for R&D Expense Deduction

(I) Case Summary

Hua's Technology Co., Ltd. is an enterprise mainly engaged in the research, development, and application of new energy technologies, and has obtained the qualification for high-tech enterprises. According to the national tax incentives for high-tech enterprises, Hua's Technology declared R&D expenses for additional deduction from 2019 to 2021. Faced with a new round of high-tech enterprise qualification and investment from new shareholders, Hua's Technology needed to screen potential tax risks. Therefore, the company entrusted an external professional service institution to conduct a health check on the company's tax-related matters. Hua's Technology provided detailed R&D project materials and expense details.

(II) Main Risk Points

1. Incomplete document retention: Some high-tech enterprises have deficiencies in financial management, leading to improper storage or incomplete records of some documents. This lack of documentation may not only affect the tax authorities' verification of the authenticity of the company's R&D expenses but also may result in the company being unable to provide necessary evidence during tax audits, thus facing the risk of not being able to enjoy tax incentives or having to pay back taxes.

2. Non-standard project expenditure: In practice, some enterprises may have irregularities in listing additional deduction items for R&D expenses due to insufficient understanding of policies or inadequate internal management. This includes incorrectly including expense items that do not meet the additional deduction conditions in R&D expenses, or lacking necessary accuracy and reasonableness in the collection and accounting of expenses. For example, enterprises may wrongly include regular operating costs, market research expenses, or salaries of non-R&D personnel in R&D expenses.

(III) Risk Prevention Path

The lawyer team first conducted a comprehensive check of Hua's Technology's R&D projects and expenses and found the following issues with the company, suggesting that the company rectify them before applying for additional deduction.

1. R&D materials were not retained, which does not meet the additional deduction standards. Hua's Technology did not retain research resolution documents, development project plans, R&D expenditure auxiliary accounts, and other materials for reference from 2019 to 2021, which does not comply with the regulations for additional deduction of R&D expenses and may be identified as fabricating false tax bases.

2. There is an act of over-listing R&D expenses. Hua's Technology added the corresponding cost of gold, which was not included in some R&D products, resulting in an over-listing of nearly 800,000 yuan in additional R&D expense deductions. At the same time, Hua's Technology used some R&D raw materials in production, which were not actually invested in R&D, leading to an over-calculation of R&D expenses and the risk of being identified as tax evasion.

3. Wages, social security fees, and housing provident fund expenses of non-R&D personnel were listed in R&D expense deductions. Hua's Technology listed nearly 900,000 yuan in total for these expenses.

4. Other acts of not withholding and paying personal income tax on behalf of others. Hua's Technology spent more than 120,000 yuan on personal expenses for shareholder He, which was listed in the corporate income tax before deduction, and personal income tax was not declared. Enterprises should treat personal expenses for shareholders as dividends and withhold and pay personal income tax on behalf of them.

(IV) Case Insights

For enterprises, it is essential to strictly comply with tax regulations. When enjoying tax incentives, enterprises must ensure that their declared R&D expenses fully comply with the standards and conditions stipulated by the state. Any non-compliant collection and deduction of expenses may lead to tax risks. Enterprises should establish a sound R&D expense management and internal control system to ensure that each link of the R&D project, such as initiation, execution, expense collection, and accounting, has clear records and standardized operational processes. When declaring additional R&D expense deductions, all relevant research resolution documents, project plans, R&D expenditure auxiliary accounts, and other supporting materials should be retained to provide sufficient evidence during tax audits.

In addition, regular tax health checks are crucial for enterprises as they help identify potential tax risks, ensure tax compliance, and avoid unnecessary fines and reputation damage. Through professional tax reviews, enterprises can optimize tax strategies, plan finances reasonably, improve operational efficiency, and provide a solid tax foundation for future investment decisions.

III. Case Analysis of Tax Self-Examination for Shareholding Reduction in Prospective Listed Companies

(I) Case Summary

When Company A was established in 2005, Party A entrusted his brother, Party B, to hold 7.6% of the shares on his behalf, and Party C also entrusted Party B with 5.4% of the shares, although there was no familial relationship between Party B and Party C. During the IPO process, Company A faced the issue of resolving the shareholding proxy relationship. In the process of shareholding reduction, no tax declaration was made, and the tax authorities required the company to conduct a self-examination. Therefore, Company A contacted a lawyer to assist with this tax self-examination.

(II) Main Risk Points

In practice, some tax authorities believe that, according to Article 3 of the "Administrative Measures for Individual Income Tax on Equity Transfer Income (Trial)" (Announcement No. 67 of the State Administration of Taxation in 2014, hereinafter referred to as "Document No. 67"), the process of shareholding reduction actually constitutes an equity transfer and should be declared for tax. The failure to declare tax during shareholding reduction may lead to tax adjustments and even the risk of being identified as tax evasion, facing administrative and criminal liabilities.

(III) Risk Prevention Path

According to the financial statements of Company A for the year 2016, its net assets were 66 million yuan. Based on the net asset method for calculating the equity transfer price, deducting the original value of the equity, Party B needed to declare and pay more than 1.2 million yuan in personal income tax. After the lawyer's intervention, the following opinions were put forward after analyzing the disputed transactions in this case:

Firstly, Document No. 67 stipulates that the act of an individual transferring equity involves an obligation to pay personal income tax. Specifically, when an individual transfers equity to another individual or legal entity, including selling equity, company repurchase of equity, and other equity transfer actions, they are all considered equity transfers, thus generating an obligation to pay personal income tax. However, from the perspective of rights transfer, there is no actual transfer of rights during the shareholding reduction. In the process of shareholding reduction, the control of the equity is always in the hands of the actual shareholder, with the nominal shareholder merely serving as the registered holder for industrial and commercial registration purposes. Therefore, the change in industrial and commercial registration during shareholding reduction only has the effect of对抗 third parties and does not result in a legal transfer of equity ownership. Given that current tax laws have not made specific provisions for the tax treatment of shareholding reduction, we should not simply equate the formal change in equity registration with an equity transfer action and thereby determine that it has a tax obligation.

Secondly, based on the principle of substance over form, shareholding reduction should not be considered a taxable act. According to the principles of income tax, there is an obligation to pay tax only if there is income. The principle of substance over form emphasizes that taxation should be based on the substance of the taxpayer's business activities rather than their formal appearance. In the process of shareholding reduction, the "transfer" of equity from the nominal shareholder to the actual shareholder is merely a facade, or a means to dissolve the proxy holding relationship, with the aim of changing the equity registration from the nominal shareholder to the actual shareholder, thus unifying the appearance of rights with their economic substance. According to the principle of substance over form, since the shareholding reduction does not change the economic substance of the actual shareholder's investment rights, the equity change in shareholding reduction does not constitute an equity transfer, and the economic activity does not generate income from equity transfer, nor is there a need to pay personal income tax.

Furthermore, for the 7.6% equity held by Party B on behalf of Party A, the lawyer believes that even if the shareholding reduction is treated as an equity transfer, it should be allowed to be conducted between Party A and Party B at a low price or zero consideration. According to Article 13 of Document No. 67, a significantly lower transfer income between siblings is considered to have a justifiable reason. Therefore, Party B can reduce the equity held on behalf of Party A to zero consideration, without the need to pay personal income tax.

Lastly, for the 5.4% equity held by Party B on behalf of Party C, the lawyer believes that there is a dispute over whether personal income tax should be paid if the shareholding reduction is treated as an equity transfer. Article 13 of Document No. 67 provides a catch-all clause for other reasonable circumstances where the equity transfer income is significantly lower, considered to have a justifiable reason. However, in practice, different tax authorities have different interpretations of whether proxy equity falls under "other reasonable circumstances," so shareholders should communicate fully with the tax authorities to clarify the reasonableness of transferring equity at a low price or zero consideration.

(IV) Case Insights

Firstly, shareholders and companies must clearly understand the complexity of tax treatment for shareholding reduction. There has always been controversy in the industry over whether shareholding reduction constitutes an equity transfer and whether it triggers an obligation to pay personal income tax. When dealing with such issues, shareholders should take the initiative to establish good communication channels with the tax authorities and prepare detailed evidence and argument materials. Given that different tax authorities may have different treatments for shareholding reduction, maintaining an open communication attitude is particularly important. Shareholders should prepare sufficient documents and arguments so that the tax authorities can fully understand the company's position and needs.

Secondly, tax self-examination is a key measure to prevent the risk of tax audits. In response to the tax authorities' self-examination requirements, companies should actively identify and resolve potential tax issues to prevent the spread of risks. When dealing with complex tax issues, companies should consider hiring professional tax advisors or legal teams to ensure the compliance and professionalism of tax handling.

IV. Case Analysis of Tax Audit for Significantly Low Equity Transfer Prices

(I) Case Summary

In 2004, commissioned by Company B, Company A acquired a plot of land through a public auction held by the Land and Housing Bureau. In 2005, Company A transferred the land use rights to Company B. The next day, Company B applied to the Land and Housing Bureau to register the land under its name. In 2007, due to financial difficulties and inability to pay the land transfer fee for the land in question, Company B applied to the Land and Housing Bureau to establish a joint venture with Company C to develop the land, which was approved.

In 2007, Company B and Company C signed a "Cooperation Agreement," stipulating that the two parties would jointly establish Company D as the development entity for the land in question, and Company D would obtain the state-owned land use certificate for the land. Subsequently, Company B was required to transfer all its shares in Company D to Company C, with an agreed transfer premium of over 130 million yuan. A week later, the two parties jointly established Company D, with Company B holding a 20% stake. The next day, Company C paid the land transfer fee of 1.2 billion yuan and obtained the "State-owned Land Use Certificate" on August 2. That same month, Company B transferred its 20% stake in Company D to Company C in accordance with the "Cooperation Agreement." In 2014, the local tax bureau considered Company B's equity transfer to be a disguised land transfer and initiated an audit.

(II) Main Risk Points

Company B's equity transfer was deemed a transfer of state-owned land use rights and should be subject to land value-added tax (LVAT).

(III) Risk Prevention Path

In the early stages of the tax authorities' audit of Company B, a legal team intervened and engaged in multiple in-depth communications with the tax authorities.

Firstly, the tax authorities relied on three replies from the State Administration of Taxation (SAT) to determine that Company B's equity transfer should be subject to LVAT: the "Reply on the Issue of Levying Land Value-Added Tax on the Transfer of Real Estate under the Name of Equity Transfer" (SAT Letter [2000] No. 687), the "Reply on Issues Related to Land Value-Added Tax Policy" (SAT Letter [2009] No. 387), and the "Reply on the Issue of Levying Land Value-Added Tax on the Transfer of Land Use Rights by Tianjin TEDA Hengsheng" (SAT Letter [2011] No. 415). However, these replies were case-specific and did not have universal legal effect. In 2012, the Fujian Provincial Local Taxation Bureau confirmed this point in response to public inquiries, stating that "SAT Letter [2000] No. 687 is a case-specific reply and was not copied to our province. According to the Interim Regulations on Land Value-Added Tax and its implementation details, pure equity transfers are not generally subject to LVAT. The specific situation should be determined by the local competent tax authorities based on actual circumstances." Therefore, the legal team believed that the tax authorities should not make tax decisions solely based on these case-specific replies.

Secondly, for equity transfers that result in changes in real estate ownership, a blanket transparent taxation approach should not be applied. If a shareholder's equity transfer is for the purpose of improperly evading LVAT obligations, its legal form should be negated, and taxes should be levied according to the principle of substance over form. However, if the taxpayer has a legitimate reason for transferring equity and the transfer of land use rights is an incidental effect, not intended for tax evasion, then a blanket transparent taxation approach should not be applied, as it would exceed the necessary scope of the principle of substance over form. Looking at the development process of Company B, it initially planned to develop the land on its own and applied for land registration in 2005. Later, due to financial difficulties, Company B cooperated with Company C for development, and Company C obtained the land use rights certificate, a process approved by the relevant departments. The introduction of Company C was not a private plan by Company B. Therefore, in this case, the transfer of land use rights due to the equity transfer was not intended to improperly evade LVAT obligations and should not be subject totransparent taxation.

(IV) Case Insights

In practice, tax authorities often treat equity transfer cases involving the transfer of land use rights as land use rights transfers and levy LVAT. To avoid being incorrectly identified as "equity in name, land in reality" during equity transfers and facing high LVAT, shareholders can strategically plan from the following aspects: First, avoid using land value as the main basis for equity transfer pricing and instead use recognized equity valuation methods such as market approach, fair value method, and income approach to reasonably determine equity value. Second, adjust the asset structure to increase the proportion of non-real estate projects in the company's assets, reducing the risk of being identified as "equity in name, land in reality" due to a high proportion of real estate projects. Finally, if taxpayers are incorrectly identified by the tax authorities, they can defend themselves based on the principles of tax legality and autonomy of will. If the tax authorities or courts make decisions based on case-specific replies from the SAT, the parties can argue that these replies do not have universal applicability as a basis for rebuttal.

In addition, professional intervention at the early stages of tax audits is crucial for enterprises. This helps enterprises to discover and resolve potential tax issues early, avoiding possible severe penalties and reputation damage. By introducing a professional tax team early on, enterprises can ensure tax compliance, reduce unnecessary economic losses, and demonstrate integrity and transparency, which is vital for maintaining a good relationship with the tax authorities.