China company equity transfer is common, which refers to legal transfer of stock equity one holds to another person and thus the identity of shareholder transferred. According to different standards, there are various types of equity transfer. Limited company equity transfer, on one hand, must adhere to the principle of equity transfer freedom, and on the other hand, must be subject to restriction of equity transfer freedom. Due to current imperfection of equity transfer regulation that leads to certain improper development of equity transfer, there are various kinds of interest conflicts in limited company equity transfer cases.
Equity Transfer in China Includes:
1. Agreements to transfer equity between corporate investors;
2. Equity transfer between investing parties due to enterprise readjustment of registered capital by corporate investors;
3. Equity transfer between related enterprises and/or other transferees by corporate investors with agreement from other investors;
4. Transfer of initial investor equity to a successor due to merger or separation of corporate investors;
5. Change of equity or investors due to failure on the part of the corporate investor to perform investment duties as stipulated in enterprise contract or articles of association, with approval from the relevant departments in charge of examination and approval;
6. Treatment of ownership of equity by inheritors, creditors, or other beneficiaries in accordance with the relevant laws and regulations and due to bankruptcy, dissolution, forced liquidation, revocation of license, or death of the corporate investor;
7. Ownership of investor equity by pledgees or beneficiaries in accordance with legal terms or contracts and agreed to by investors.
Operating Difficulties in Equity Transfer
1. A foreign investment enterprise's transfer of equity results in material changes to the production and management nature of the enterprise.
Due to changes in the nature of production or operation, enterprises may need to: regularly apply for corporate income tax exemptions or reductions; regularly apply for VAT refunds; or withhold corporate income taxes in the event of an equity transfer.
2. A foreign investment enterprise's transfer of equity does not result in material changes to the production and management nature of the enterprise.
Tax authorities may challenge whether the price of equity transferred between two affiliated companies is reasonable or not.
3. A foreign investment enterprise that transfers equity overseas needs to pay corporate income tax on its income from the transfer.
The determination of reasonable income from the transfer that can be accepted by tax authorities has become a key issue faced by many foreign investment enterprises.
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