Editor's Note: In M&A and reorganization, the use of partnership structure to implement equity transfer is a common operation, and its tax treatment follows the principle of "share first, tax later". In the past, it was common to use this structure for tax planning. Starting from 2022, according to the Announcement on the Administration of Individual Income Tax Collection on Income from Equity Investments (Announcement No. 41 of the Ministry of Finance and the State Administration of Taxation of 2021), equity investment partnerships have been subject to the full application of checking and collection of income tax. This article reveals, through a case study, the risks and coping strategies faced by enterprises encountering false tax declarations by "black intermediaries" in the context of M&A under this policy, with the aim of alerting taxpayers and intermediaries to pay attention to tax compliance and avoiding losses due to irregularities in operation.

01 Case Sharing

In 2021, A Medical Beauty Company operated by Zhang attracted the acquisition intention of B Medical Beauty Platform Company of City A due to its good benefits. In order to promote its listing plan, Company B intended to integrate its resources through mergers and acquisitions, and the parties agreed that the acquirer would coordinate the acquisition arrangement. According to the agreement between the two parties, firstly, Zhang Mou set up Partnership C and transferred his 60% equity interest in Company A at par to Partnership C, which in turn transferred it to Platform B. Through this structure, the equity transfer was realized and the premium was retained in the partnership.

In accordance with the planning program of the tax intermediary appointed by the acquirer, the intermediary established Partnership C in an industrial park in City B and acted as an agent for tax filing, promising to reduce the tax burden for both parties to the transaction through the approved collection policy. After Partnership C successfully transfers its equity, Platform B pays Partnership C 20 million RMB for the equity transfer, and Partnership C transfers its equity at a cost of 5 million RMB. At this time, if the tax is calculated in accordance with the 35% tax rate applicable to the income from production and operation, Zhang should pay a tax of 5.23 million yuan. If the approved collection policy is applied in accordance with the Provisions on Individual Income Tax for Investors of Wholly Owned Enterprises and Partnership Enterprises (Cai Shui [2000] No. 91), the tax base can be substantially reduced by lowering the taxable income rate to 10%, and the theoretical tax payable is 700,000 RMB. However, in practice, the tax intermediary did not apply for the approved levy in accordance with the law, but rather completed the declaration with a small amount of production and business income superimposed on the fictitious tax-exempt income from treasury bond interest, and ultimately paid only 700,000 yuan of tax and provided Zhang with tax clearance certificates, and subsequently cancelled the C partnership.

In April 2025, the tax authorities of City B notified Zhang that there was a large amount of tax-exempt income from treasury bond interest to be verified in the tax return of the partnership in which he was involved, and then issued a tax inspection notice to initiate an investigation. Zhang Mou on the intermediary commitment to the approved levy and the tax authorities to verify the results of the contradiction questioned the intermediary under deep investigation before admitting that there is a false operation in the declaration of the problem. At present, the tax authorities initially determined that Zhang need to pay 4.53 million yuan in back taxes at a rate of 35% and the corresponding late payment fees, and may also face subsequent fines.

So why did the intermediaries abandon the authorized levy in the application of the policy and adopt false tax exemption declarations? Behind this operational choice, there exists both the objective constraints of changes in the policy environment and the subjective motivation of intermediaries to evade regulation in pursuit of short-term benefits.

02 Undesirable model of authorized taxation of partnership transfers of equity interests

The original intent of the approved levy policy was to prevent tax evasion and to serve as a necessary complementary means when account-checking levies could not be realized. However, in practice, especially under the "fancy operation" of attracting investments in the so-called tax depressions, the scope of application of the approved levy has been expanded without any restriction, and it has gradually become a black hole of personal income tax affairs. In the past, it was more common to utilize partnership enterprises for equity transfer and tax planning through approved levy. This structure saves a significant amount of tax liability compared to a direct transfer of equity by a natural person that is subject to a 20% personal income tax. For example, in the Talos case disclosed in 2022, the partnership indirectly transferred its equity interest and paid only $4,958,200 in personal income tax, saving $18,979,600 compared to the $23,937,800 in direct transfer by a natural person, which is a tax saving of up to 79%.

However, this mode was completely ended with the policy adjustment in 2022.On December 30, 2021, the Ministry of Finance and the State Administration of Taxation issued the Announcement on the Administration of the Collection of Individual Income Taxes on Income from Equity Investments and Operations, making it clear that since January 1, 2022, the method of checking and levying will be applied to sole proprietorships and partnerships that hold equity, stocks, partnership property shares and other equity investments. The individual income tax is calculated, completely plugging the loophole of tax avoidance on equity transfers using approved levies.

In this case, the parties to the transaction with the intermediary agency signed the agreement time earlier than the policy, but the actual operation of the policy has been formally implemented. The intermediary should terminate the illegal planning, truthfully inform the acquirer and Zhang Mou actual situation. If the transfer of equity has not yet been completed, it is possible to cancel the partnership, the natural person directly transfer equity, etc., at a rate of 20% of the tax rate to pay personal income tax. However, in order to earn service fees, the intermediary agency, knowing that it could not apply for the approved levy, not only did it not prompt the policy change, but also created the illusion of "approved levy" with a low tax burden by fictionalizing a large amount of tax-exempted income from treasury bond interest and submitted the tax completion certificate to the partner. This kind of fraudulent behavior ultimately led to the outbreak of tax risks, which is a typical "black intermediary" irregular operation behavior.

03 Tax Risks for Partners in Indirect Equity Transfers in Partnerships

In the above case, partner Zhang faced multiple tax risks such as tax reimbursement, late payment fees and penalties due to the false declaration of "black intermediary", which is analyzed as follows:

First, partner Zhang faced the risk of paying back taxes. From the establishment of the partnership to its deregistration, the essence of its behavior was the indirect transfer of equity for profit through the establishment of the partnership. The intermediary organization fictionalized a large amount of taxable income as tax-exempt income from treasury bond interest for tax reporting purposes, which resulted in the tax paid being much lower than the actual amount of tax payable, and Zhang was therefore exposed to the liability for back taxes. It should be noted that even if the partnership has been canceled, its tax obligations and legal liabilities still exist, and the deregistration of market entities does not affect the tax authorities' ability to pursue liability in accordance with the law.

Secondly, partner Zhang also faced the risk of being charged late fees. According to Article 32 of the Tax Collection and Administration Law, if a taxpayer fails to pay the tax in accordance with the prescribed period, the tax authorities shall, in addition to ordering the payment of the tax within a certain period of time, impose a late fee of five ten thousandths of a percent of the amount of the late tax on a daily basis from the date of the late payment of the tax. In this case, with the increase of the late payment time, the late payment fee will naturally accumulate, further aggravating the tax burden of the partners.

Finally, partner Zhang faces the risk of being characterized as a tax evader. According to Article 63(1) of the Tax Administration Law, it can be summarized that the constituent elements of tax evasion include subjective elements (taxpayer), behavioral elements (five types of tax evasion) and hazardous consequence elements (non-payment or underpayment of tax). In addition, the constituent elements of tax evasion should also include the subjective intent element, which can be derived not only through the textual interpretation of Article 63(1) of the Tax Administration Law, but also in the tax normative documents, such as the General Taxation Letter [2013] No. 196 and the General Taxation Letter [2016] No. 274. In this case, whether the partner knew and participated in the false declaration behavior of the tax intermediary will directly affect the determination of whether it constitutes tax evasion. If partner Zhang is characterized as tax evasion by the tax authorities, he will face a fine of 0.5-5 times of the tax amount in addition to paying the back tax.

04 Top Strategies for Partners to Address Tax Risks

In the face of the above tax risks, partner Zhang can adopt the following strategies to deal with them:

First, actively pay back taxes. Equity transactions carried out through the partnership "bridge", its tax source is fixed in the place of registration of the partnership, and the current policy clearly requires that the equity investment partnership applies the checking account levy. Even if the enterprise has been canceled, the tax authorities will still recover the tax according to the substance of the transaction. In this case, the premium of 15 million yuan for the equity transfer was treated as income from production and operation, and 5.23 million yuan of tax had to be paid at the 35% super progressive tax rate, and the difference of 4.53 million yuan from the 700,000 yuan that had already been paid had to be made up in a timely manner.

Secondly, there is some room for defense on the issue of late payment. According to Article 20 of Cai Shui [2000] No. 91, the partnership enterprise shall declare and pay individual income tax for the production and operation income obtained by the investor from the partnership enterprise to the competent tax authority of the place where the enterprise actually operates and manages, and copy the individual income tax return to the investor. Although it is not a typical withholding obligation relationship between the partnership and the partners, based on its statutory duties of acting as an agent for filing tax returns and copying the information of the returns, there is a view in practice that it is regarded as an obligation of a withholding nature. The third paragraph of the Approval Reply of the State Administration of Taxation on the Issue of Individual Income Tax Not Withheld by Administrative Organs (Guo Shui Han [2004] No. 1199) clearly stipulates that, "In accordance with the principles stipulated in the Levy and Administration Law, the withholding agent shall withhold the tax not yet withheld, and shall not add late fees to the taxpayers or the withholding agents, no matter whether it applies to the pre-revised or the revised Levy and Administration Law. " Therefore, based on the above provisions, Mr. Zhang could argue that the tax was "due to be withheld but not yet withheld" and seek to be exempted from the late payment fee.

Third, for tax evasion qualitative problem, the core is to determine whether there is conspiracy and subjective intent between Zhang and the intermediary. From the behavioral point of view, although the partners have the obligation of tax declaration, but the specific declaration matters by the partnership entrusted tax intermediaries, in this case, "black intermediary" in the case of not truthfully declared, neither in accordance with the provisions of the declaration of the content of the copy to Zhang, nor informed of the operation of fictitious treasury bond interest tax-exempt income, resulting in the declaration of the data on Zhang Zhang had no knowledge of the authenticity of the declared data. Since Zhang has neither the cognitive element of "knowing tax evasion" nor the volitional element of "actively pursuing the result of tax evasion", he can rely on the subjective intent of tax evasion to argue that he had no knowledge of the intermediary's false tax declaration, no participation and no conspiracy, and thus should not have been involved in it. He or she may plead that he or she had no knowledge of the intermediary's false tax declaration, did not participate in it, and did not conspire with it, and thus should not be characterized as tax evasion.

Fourthly, for property losses caused by irregularities in the operation of "black intermediaries", the tax intermediary organization can be actively pursued for compensation. Article 962 (2) of the Civil Code provides that "if an intermediary intentionally conceals important facts related to the conclusion of a contract or provides false information to the detriment of the principal, he shall not request payment of remuneration and shall be liable for compensation." In this case, the "black intermediary" has committed false fraud and failed to fulfill the obligation of truthful reporting, and its behavior has clearly violated the above legal provisions, so Zhang can sue the intermediary agency to return the received remuneration and compensation for the corresponding losses. It should be noted that, usually approved levy needs to be applied for by the enterprise and obtain the tax authorities issued a notice of approved levy as the basis. In view of the fact that Zhang did not understand the relevant regulations and procedures of the approved levy and was not obliged to verify on his own whether the tax payment met the conditions of the approved levy, he did not ask the intermediary for the instrument. However, if the intermediary had fulfilled its obligation to provide truthful information in a timely manner, Zhang could have adjusted the structure of the transaction in a compliant manner and avoided incurring additional losses such as late payment fees.

05 Conclusion

This case is an important revelation for both tax intermediaries and taxpayers. Tax intermediaries are required to strengthen their awareness of compliance and carry out their business in strict compliance with the law. The state's supervision of tax intermediaries providing tax planning services in violation of the law has gradually increased. As early as May 2017, the Measures for the Supervision of Tax-Related Professional Services (for Trial Implementation) formulated by the State Administration of Taxation ("SAT") listed "tax planning" as one of the tax-related businesses of tax-related professional service providers, but the new Measures for the Administration of Tax-Related Professional Services (for Trial Implementation) formulated by the SAT in March 2025 has already listed "tax planning" as one of the tax-related businesses of tax-related professional service providers. However, the new "Measures for the Administration of Tax-Related Professional Services (Trial Implementation)" issued by the SAT in March 2025 has changed the tax-related business of "tax planning" to "tax compliance program", which in essence no longer allows tax intermediaries to engage in pure tax-saving planning business. Therefore, tax intermediaries need to ensure that their services are in compliance with laws and regulations, eliminate irregularities for the purpose of tax evasion and avoidance, and adjust their business structure in a timely manner in accordance with national policies.

At the same time, taxpayers should deeply recognize the risks of illegal tax planning, be alert to the illegal acts of intermediaries, strengthen the study of tax law in daily operation, enhance legal awareness, avoid neglecting the potential risks due to the blind pursuit of tax-saving effect, and prevent being misled by unscrupulous intermediaries to take part in illegal operations. When complicated tax issues such as equity preferences are involved, taxpayers should consult professional tax lawyers to assess the compliance of their business activities to ensure that their business can withstand the test of tax law, avoid repeating the mistakes made in this case, and effectively safeguard the legal compliance of their business activities.