Lin Zhaonan v. Xiamen Municipal Local Taxation Bureau Foreign Taxation Branch
　　

   Questions:

 1, how to determine the tax on equity transfer behavior?

  2, compensation should be the collection of personal income tax?

The case:In 1996 May, America JEAN PHOENIX INC (hereinafter referred to as the "USA JPI company") for the establishment of the Xiamen East Sea Club Co. Ltd. in Xiamen city (hereinafter referred to as the Xiamen East South Sea Co). After the plaintiff Lin Zhaonan paid $300000 to participate in the investment, as the company's vice chairman, and by his son Lin Hongjie to exercise daily management, company management. In May 5, 1999, Lin Zhaonan signed the "contract" and America JPI company, the two sides agreed by the America JPI company returned into Xiamen East South Sea Co funding of $200000 to 830000 yuan and Lin Zhaonan, and then to pay 300000 dollars as compensation. After signing the contract, American JPI company to pay $2000, and $98000 in May 24, 1999. June 10, 1999 in the coordination of foreign investment center in Xiamen city and Xiamen City Taiwanese complaint center and other departments of the two sides to reach an agreement, confirmation, in 1999 June 16 days before American JPI company will not pay $500000 to $150000 and Lin Zhaonan, to pay 2905000 yuan. After the two sides are about to perform according to the agreement.
　　

   Xiamen Local Taxation Bureau Foreign Taxation Branch (hereinafter referred to as the "city of Xiamen tax bureau") in June 28, 2002 to make the tax check No. 200000784th tax treatment decisions, identified in May 5, 1999, Lin Zhaonan signed the "contract" and America JPI company, agreed to pay $600000 as a share and compensation of Xiamen Lin Zhaonan from the East South Sea Co by the company. To June 6, 1999, America JPI company paid a total of $150000 and 3735000 yuan, Lin Zhaonan quit the share and compensation of Xiamen East South Sea Co, deduct Lin Zhaonan shares the equity capital of $200000 and 830000 yuan, Lin Zhaonan made a total of the transfer of equity premium 2490000 yuan, to be fully tax. According to the "PRC law on personal income tax" in the ninth paragraph of the first, second and the "PRC tax collection and management law" provisions of article twentieth, to be paid to the transfer of property from the personal income tax 498000 yuan, the failure to declare and pay the behavior daily added 0.2 ‰ of the fines of 89640 yuan; according to "the people's Republic of China Interim Regulations on stamp duty" the first, second, third and the "Provisional Regulations of the people's Republic of China stamp tax rules for the implementation of" second, "the Ministry of finance, the State Administration of Taxation on stamp duty issues notice" provisions, Lin Zhaonan should be according to the transfer of property rights contract -- "the book" the amount to pay 5/10000 stamp duty 2490 yuan. Local Taxation Bureau in Xiamen city in November 14, 2001 to make Xiamen local referendum (2001) No. 1 administrative reconsideration decision: to maintain the tax levy tax treatment decision No. 200000784th.

   Lin Zhaonan refuses to accept, lodge an administrative lawsuit in Xiamen Kaiyuan District People's court. The Plaintiff alleged that: the plaintiff is not Xiamen East South Sea Co shareholders, the exit the company does not belong to the equity transfer behavior, identified from America JPI made $300000 for the transfer of equity premium, inconsistent with the facts, but also the lack of legal basis. The plaintiff during the Xiamen East South Sea Co working for this company acting mat money not identified, is unclear facts, make a decision for handling the tax improper application of the law, damage the legitimate rights and interests of the plaintiff, the request shall be revoked the tax treatment decision.
　　

   The defendant argued that the plaintiff in Xiamen: East South Sea Co real investment and performing management Ping duties, Department of dormant partner of the company, should maintain Xiamen East South Sea Co Department of the plaintiff and American JPI joint venture company. In May 5, 1999, the plaintiff and America JPI company signed a "contract", in fact, the equity transfer agreement, the plaintiff made the payments should be recognized as equity transfer income, not the plaintiff said father to labor remuneration, including its generation pad design costs, travel and entertainment expenses of compensation, the plaintiff failed to provide evidence in support of the case, the defendant was in accordance with the decision for handling the tax clear facts, irrefutable evidence, correctly applies the law, legal procedures, request the decision upheld.
 　

   Court of the first instance that: Xiamen city tax bureau according to the Xiamen City Intermediate People's Court (2000) No. 126th Xia people final judgment, confirmed that Lin Zhaonan is one of the Xiamen East South Sea Co shareholders; the nature and content of $300000 that signed the May 5, 1999 forest Zhaonan and America JPI company "contract" is not clear to compensate Lin Zhaonan, but you can confirm Lin Zhaonan to withdraw from Xiamen East South Sea Co investment compensation, and makes clear the Lin Zhaonan from the investment by JPI company, American separate operating Xiamen East South Sea Co, to bear the risk liability. From Xiamen East South Sea Co signed documents can be seen from Lin Zhaonan, Lin Zhaonan and America JPI company signed a "contract book", is actually the equity transfer agreement, Lin Zhaonan compensation, is the transfer of property compensation, Xiamen city tax bureau to establish the facts are correct.
　　

   Lin Zhaonan put forward the proceeds should be deducted from the costs associated with the generation of Xiamen East South Sea Co paid, including design fees, transportation fees and remuneration for labor compensation, but Lin Zhaonan failed to provide the original receipt. In addition, the June 10, 1999 "coordination meeting minutes" that Lin Zhaonan put forward related costs by the Xiamen East South Sea Co pay. Lin Zhaonan received the amount deducted the amount of capital contribution after the 2490000 yuan essence is the transfer of ownership of the profit, compensation for Lin Zhaonan advances and related costs are not. And the forest Zhaonan cannot provide evidence of labor compensation amount to determine the remuneration and USA JPI company's compensation includes its due, so Lin Zhaonan's claim shall not be supported. In accordance with the "administrative procedure law of the people's Republic of China" article fifty-fourth (a) provision, the court made judgment on May 28, 2002 are as follows: to maintain the Xiamen city tax tax tax branch No. 200000784th tax treatment decisions.
　　

    After the verdicts, Lin Zhaonan refuses to accept, appeal that: (1) a court finds that the "contract" is the equity transfer agreement, and legal conflict. The laws and regulations of our country, enterprises with foreign capital shall be subject to the industry and commerce registration authorities and approved by the approval authority, although Lin Zhaonan has the actual investment, but it has not been approved by the competent authority, is not a legitimate investment behavior, it does not enjoy the rights of shareholders, "contract" is not the equity transfer agreement. Lin Zhaonan investment in Xiamen East South Sea Co is a kind of invalid civil behavior, signed with the America JPI company is terminated the civil action after the return of property agreement. Xiamen City Intermediate People's Court (2000) No. 126th Xia people final civil judgment that Lin Zhaonan is Xiamen East South Sea Co "silent partner" no basis, the decision can not be identified as the basis for the shareholders of the South Sea Co of Xiamen East Lin Zhaonan; (2) a trial had not recognized Lin Zhaonan as Xiamen East South Sea Co in advance payments, inconsistent with the facts. Lin Zhaonan has proved the existence of generation pad costs, these costs have been paid to Lin Zhaonan, Xiamen city tax bureau shall bear the burden of proof, and American JPI paid $300000 for Lin Zhaonan compensation, is wrong to give the full tax.
　　

   Xiamen city tax bureau said in reply: (1) Lin Zhaonan is the actual shareholders, a court verdicts confirmation; (2) Lin Zhaonan Premium section allow all doubt; (3) Lin Zhaonan proposed advance payment, not the original documents, Xiamen East South Sea Co also denied; (4) Lin Zhaonan submitted "CPA review report" without certification, can not be used as evidence.
　　

   Trial court that: according to the "Regulations of the people's Republic of China Law on foreign funded enterprises" sixth, seventh, the foreign capital enterprise approved by the competent foreign trade and economic administrative departments or the department authorized by the review, and by the administrative department for Industry and commerce registration issued business license, to set up. Xiamen East South Sea Co approved by the relevant departments, the industrial and commercial registration, the investor is American JPI company, Lin Zhaonan is not the company's legal shareholders. Because of the investment behavior of Lin Zhaonan did not get approval and approval of relevant departments, it does not have legal status as a shareholder. Xiamen city tax bureau thinks Lin Zhaonan is Xiamen East South Sea Co shareholders, there is no legal basis.
　　

  Lin Zhaonan and American JPI company in consultation with its exit of Xiamen East South Sea Co investment, agreed to by the USA JPI the company to return to Lin Zhaonan's investment $300000, because Lin Zhaonan is not a Xiamen East South Sea Co shareholders, so the Xiamen East South Sea Co's investment is not capital, can only be identified as an ineffective investment behavior, $300000 is the return of principal. Xiamen city tax bureau will be recognized as capital, in violation of relevant state laws and regulations. As to the nature of $300000 in compensation identification problem: given the Lin Zhaonan investment to Xiamen East South Sea Co is ineffective investment, obtained from the American JPI company compensation can only be identified as the property income. $300000 compensation to Xiamen city tax bureau made Lin Zhaonan identified as equity transfer premium and the full tax, is a fact that is not clear.
　　

  In addition, Xiamen city tax bureau the decision of Lin Zhaonan stamp duty levied on punishment does not involve Lin Zhaonan, the "Ministry of finance, the State Administration of Taxation on stamp duty issues notice" provisions of laws and regulations, improper, reference. In accordance with the "administrative procedure law of the people's Republic of China" (three) of article sixty-first, article fifty-fourth (two) first, 2 Provisions, the court made judgment on December 17, 2002 are as follows: first, the revocation of Xiamen Kaiyuan District People's Court (2002) at the beginning of the word no. first train administrative judgment; two, the revocation of Xiamen City Tax Bureau Tax levy tax treatment decision No. 200000784th.
　　　

　Case analysis:

     Compensation payments, charged a plaintiff whether belongs to the equity transfer price?
　　

   "Foreign investment enterprise law of the people's Republic of China" the second regulation, foreign enterprise refers to the total capital established within the territory of China by foreign investors of the enterprise; sixth, the provisions of article seven, foreign-funded enterprises by the State Council department in charge of foreign economic trade or the organs authorized by the State Council approved the review of, and by the Administration for Industry and commerce registration and issue a business license, party for the establishment of. "Tenth rules", the provisions of article fourteen law of the people's Republic of China, foreign investors to set up foreign-invested enterprises, shall apply to the examination and approval authorities, including foreign investors name for the book. With the domestic ordinary limited liability company registration take approval system is different, the foreign enterprise establishment registration is the implementation of strict examination and approval system, not matter the audit approval of the approving authority does not have legal effectiveness. Xiamen East South Sea Co by the relevant departments approved the establishment, can be learned from the industrial and commercial registration and the articles of association of Xiamen East South Sea Co, the company's investment for the USA JPI company. Although Lin Zhaonan in private investment, but because it does not handle the formalities for examination and approval, the investment behavior does not have legal status as a shareholder.

    If the Xiamen East South Sea Co belongs to non foreign limited liability company, the situation may be more complicated. Due to the current company law and other laws and regulations on the qualification of shareholders lack of clearly defined, the practice court in the identification of dormant shareholders (i.e., although the actual contribution, but in the articles of association of the company, shareholders, business registration has recorded for others) problem is not completely deny the dormant investor shareholder status, so in this case can be dormant shareholders to recover the investment as "equity transfer" behavior? From the majority of court decisions, admit of dormant shareholder shareholder status is mainly applicable to the internal dispute case. External third party acting in good faith for the firm of economic and trade, the court believes that industrial and commercial registration has effect of external publicity, usually tend not to admit of dormant shareholder shareholder status. So the tax authorities can be based on "substantial taxation principle" direct identification of dormant shareholder shareholder identity, or as a related behavior outside third can only be determined according to the industrial and commercial registration list of shareholders is the equity transfer? The author thinks, this involves the "substance over form" principle "and" tax in accordance with the "principles of balance, according to the relevant tax law theory and legal precedent theory, except as otherwise stipulated by law or its interpretation in favor of the taxpayer, not in essence taxation principle of analogy, that create or increase the tax burden of taxpayers in tax evasion; but the situation application of substantive taxation principle [1]. In this case, the plaintiff is not evade tax law, especially in the "substance over form" principle has not yet been formally to absorb the situation, at present should be to identify the transfer behavior is the equity transfer behavior properly according to the transfer of the identity of the shareholders.

  (two) the civil verdict court can directly as the administrative evidence?

  In this case the tax authorities according to the plaintiff was identified as the shareholders civil judgment, the plaintiff compensation for identified as equity transfer premium. But the court of second instance in determining whether the plaintiff has shareholder identity, there is no simple compliance has been effective civil judgment, the relevant provisions but directly applicable law on foreign capital enterprises to judge. So the conclusion of recognition in civil judgment as the admissibility of evidence in the administrative lawsuit? The laws of that time has no clearly defined, in the case of the second instance procedure, the October 1, 2002 implementation of the "Supreme People's court" about some problems of administrative procedure evidence rule seventieth, "the entry into force of the people's court judgment or arbitration documents to confirm the facts, can be used as the basis for a final decision. But if it is found that the judgment or ruling documents the fact that there are major problems, should suspend litigation, litigation recovery corrected through legal procedures." Judicial interpretation from the point of view, the entry into force of the people's court judgment and confirm the fact that can be used as evidence. Although the judicial interpretation and does not apply to this case because of the time reason came into effect, but the author thinks, even if the application should not suspend litigation. The reason is that before the civil court judgments is not the plaintiff shareholders is the fact that simple, but related to law application. The Xiamen East South Sea Co funds investment behavior belongs to the facts, but the investment behavior is the nature of what is a legal judgment, so it cannot be used as evidence of a simple reference.

  Three. Whether the compensation the plaintiff charges should be levied individual income tax?

  As mentioned above, since the plaintiff is not the company's legal shareholders, the investment of Xiamen East South Sea Co does not belong to the investment behavior, the plaintiff from Xiamen East South Sea Co investors USA JPI companies charge the original investment and the additional compensation will not be identified as stock right transfer payment. The tax authority according to the "Regulations for the implementation of" Eighth "tax second said the scope of personal income of individual income tax law of the people's Republic of china:...... (nine) income from transfer of property, the Provisions refers to the transfer of individual securities, equity, buildings, land use rights, machinery and equipment, travel and other property obtained from "in accordance with the" transfer of property income "taxation without legal basis, which is qualitatively incorrect. The plaintiff and American JPI company signed a protocol and no additional compensation content further clear, the compensation should be how to qualitative and tax?

  The viewpoint says, can be identified as "income from transfer of property" under the project transfer "other property to obtain income". The author thinks, according to the "Regulations" the implementation of the individual income tax law of the people's Republic of China, the power to interpret the transfer "other property to obtain income" concept to the Ministry of Finance and the State Administration of Taxation, the local tax authority has no right to explain. It will be based on "personal income tax law of the people's Republic of China" in article second, the tax according to the "other income"? In view of the law in second of the eleventh paragraph of "other income" tax is determined by the financial department of the State Council, so at the Ministry of finance is not the case income determine the taxation circumstances, tax authorities are not additional compensation of this nature into the scope of Taxation of personal income tax self.

Note 1: Zhang Shouwen: "Fiscal Law Commentary", Peking University press, 2005 edition, page sixtieth