Explanations on Important Articles of the Stamp Duty Law

Author | Min Liao

Shanghai Landing Law Offices

On June 20, 2021, the Standing Committee of the National People's Congress promulgated Stamp Duty Law of People’s Republic of China (the “Stamp Duty Law”), effective from July 1, 2022. The legislation level of stamp duty administration rises up to law. Release of the law is significant as tax is an important guidance tool for the economic development.

This article will give brief introduction on main revisions the Stamp Duty Law made to the Interim Regulation of the People’s Republic of China on Stamp Duty (the “Interim Regulation of the Stamp Duty Law”), illustrate concepts of taxpayer and taxable document, analyze relationship of tax basis of stamp duty and contract, as well as discuss stamp duty levied on the equity transfer. 

I. Brief Introduction of Relevant Provisions of the Stamp Duty Law

The Stamp Duty Law revised provisions on taxable items, tax rate, tax reduction and exemption etc. For details, please find in the chart below:

II.Taxpayer of Stamp Duty 

i.Concept of Taxpayer

All units and individuals which conclude any of the documents listed in the law and undertake security trading in China, and conclude any of the documents listed in the law outside China but use such documents in China, shall be regarded as obligatory payers of stamp duty.

The taxpayers can be units or individuals, which include units registered in or outside China and Chinese and foreign individuals. Details of concept of units may refer to the Detailed Rules for Implementation Measures on Interim Regulation of the People's Republic of China on Stamp Duty. However, whether enterprises wholly-owned by an individual and partnership enterprises are units or not from stamp duty perspective, needs to be clarified. 

ii.Taxable Document

The Stamp Duty Law defines taxable document as contracts, documents of transfer of property rights and business book of account listed in the Stamp Duty Tariff Table Item. Though the law revises “document of a contract nature” specified in the Interim Regulation of the Stamp Duty Law to “contract”, the author thinks the “contract” under the Stamp Duty Law should be a broad concept.

Firstly, what is contract? According to the Civil Code of China, contract refers to agreement defining civil rights and obligations which are concluded, amended and terminated between natural persons, legal persons or other organizations of equal status. Rights and obligations not arose from contract shall apply other relevant laws and regulations, such as negotiorum gestio, unjust enrichment and tort etc. 

The Stamp Duty Law lists 11 kinds of written contracts as taxable documents. The author thinks no matter what names of the contracts are, such as agreements, project cooperation agreements, service agreements, etc., contents of contracts in substance will determine whether they are taxable documents or not. If they meet characteristics of contract under the Stamp Duty Law, they are taxable documents. 

Secondly, is ownership retention sales contract taxable document? No provisions of the Stamp Duty Law specifically clarify whether the sales contract (except individual chattels sales contract) includes ownership retention sales contract. There are two opinions on this issue. One holds that ownership retention sales contract is taxable document. Though such contract possesses characters of sales and security, the contract is sales contract in substance. The creditor only places security on her rights through ownership retention. Similarly, in processing contract, if the party who has placed the order fails to pay in full in accordance with the contract, the contractor is entitled to place lien on the goods. Since the processing contract has been executed, whether the contractor exercises rights of security will not affect such processing contract is a taxable document or not. The other opinion believes ownership retention contract is not taxable document, since ownership transfer is important in sales contract. No ownership transfer means no contract. Therefore, the transaction document is not taxable. To be conservative, the author agrees with the first opinion. 

Thirdly, is the non-written contract taxable document? According to the Stamp Duty Tariff Table Item, written contract is taxable document. According to the Civil Code of China, parties can conclude contracts in writing, orally, or in some other form. The Stamp Duty Law assumes contracts for important and complicated transactions will be in writing. Any deals undertaken orally, such as goods sales or processing etc. are not taxable.

iii.Tax of Security Trading 

Securities trading is firstly introduced into the Stamp Duty Law. The type of securities under the Law of Stamp Duty is fewer than securities as defined in the Securities Law of China. Trading of stocks and Chinese Deposit Receipts are taxable, but stamp duty is not applied to trading of corporate bonds, treasury bonds, securities investment fund units, asset backed securities and assets management products etc. under Securities Law of China and other relevant laws and regulations.

Foreign security trading is not taxable. The stamp duty only applies to the trading of stock and Chinese Deposit Receipts. For example, though the Chinese Deposit Receipts issued by innovative enterprises in China (the “CDR”) represents rights and liabilities of foreign securities, the CDR trading is taxable as the trading takes place in China. According to the Announcement of the Ministry of Finance, the State Taxation Administration and the China Securities Regulatory Commission No. 52 [2019], the seller is subject to 1‰ stamp duty for the CDR trading with tax basis of actual trading amount. The term of the CDR tax pilot program is three years. CDR trading will comply with the Stamp Duty Law after the law takes into effect.

III. Tax Basis

i. Tax Basis and Contracts

What is tax basis of contracts and documents of transfer of property rights? According to the Stamp Duty Law, tax basis of stamp duty is the amount specified in the contracts and documents of transfer of property rights. If no amount specified, the tax basis is the actual settled amount. If the actual amount cannot be determined, it shall be market price at the date of contract execution and property rights transfer issuance. Price set forth in compliance with government shall govern. For details, please find in the chart as below:

i) Revision and amendment of contract

The logic to determine tax basis for stamp duty is amount of price specified in the contract takes the first priority. In case the contract price term is missed or ambiguous, tax basis shall be the actual settled amount. In practice, it is normal the contract price is different than the actual settled amount. And the parties fail to execute supplementary agreement to reveal the change. Under this circumstance, the tax basis is contract price but not the actual settled amount. Assuming the actual settled amount is higher than the contract price, the taxpayer may pay less tax provided they don’t sign supplementary agreement. Sacrifice is the parties may face risk arising out of contract performance as they don’t sign contract. If, on the other hand, the actual settled amount is higher than the contract price, the parties may have motive to sign the supplementary contract so that to decrease tax basis.

In addition, how to tax when contract price may change pursuant to certain mechanism? According to the principle of substance over form, the tax basis is not contract price since the amount of price is not a certain amount, even the amount can be set forth according to price change mechanism. Therefore, under this situation, tax basis is the actual settled amount. In practice, the parties usually sign written document to specify the final price and the final price is the actual settled price/amount.

ii) Contract termination and breach of contract

How to tax when the contract is terminated? Time of occurrence of tax payment obligations is execution or issuance of taxable documents. Thus, even the documents are terminated due to various reasons, the tax payment obligations shall not be affected.

Will the liquidated damages arising out of breach of the contract affect the tax basis of stamp duty? According to the Stamp Duty Tariff Table Item, the liquidated damages or penalties are not included in tax basis of stamp duty. Therefore, liquidated damages or penalties shall not be included in tax basis of stamp duty.

iii) Tax filing

How to do tax filing when the contract is revised or amended? Once taxpayers who opt for a tax payment per deal, or for period of one quarter or a year, complete tax filing, how to do the tax adjustment when the taxable amount is revised? Taxpayer may communicate with the competent tax authority to pay tax or apply for tax refund or apply to adjust the tax payable in the following tax filing period. 

ii. Tax basis of mixed deal

How to tax when one contract involves two or more taxable transactions? The Stamp Duty Law adds a new article that when a document involves two taxable items where relevant amounts are specified in the contract, each item will be taxed separately. If no specific amount set forth in the contract, the items shall be taxed by applying higher tax rate. 

i)  Hybrid sales in respect of VAT

From VAT perspective, for a deal involves in two or more taxable items, they are taxed either via hybrid sales or non-hybrid sales.  Sales which involve both services and goods are hybrid sales. For hybrid sales, entities and individually-owned businesses engaging in manufacturing, wholesale or retail of goods, VAT shall be paid as per sale of goods; other entities and individually-owned businesses, VAT shall be paid as per sale of services.  Therefore, tax will be processed according to the identity of the taxpayers. Nature of sale of goods or provision of service is of no sense.

For taxpayers engaging concurrently in sale of goods, services, intangible assets or immovables to which different tax rates or levy rates are applicable, the sales amounts shall be accounted and the sales shall be taxed separately; if the said sales amounts are not accounted separately, the higher tax rate shall apply. In practice, it is hard to make difference of hybrid sales or non hybrid sales, except specific tax rules are available to specific deals.

ii) Relevant provisions of other countries

As to the application of law for mixed deal, different countries have different practices. For example, in U.S., UCC Art.2 applies to sale of goods, and non sale of goods, such as service, real estate, etc. shall apply common law. If it is mixed deal, it is all or nothing, depending on which is more important. For example, UCC applies to contract if the sale of goods is more important, vice versa. Exception is when the contract is expressly divided two parts with one amount allocated for the goods and the other price allocated for service, the UCC will be applied to the sale of goods and common law is applicable for the service.

IV. Stamp Duty Levied on Equity Transfer

i. Documents of transfer of property rights

The Stamp Duty Law adds document of equity transfer as one of documents of transfer of property rights. What is document of equity transfer? Written documents in relation with the equity transfer may include equity transfer contract and other relevant legal documents. Important milestones of the equity transfer normally include full payment of contract price, closing, issuance of new shareholder certificate, etc. Legal documents will be prepared for each milestone, such as payment receipt, revised business license, closing documents, shareholder certificate etc. Since issuance of new business license means the shareholder of the company has been officially changed, the taxable document for equity transfer may be the revised new business license. But business license doesn’t specify equity transfer price. Therefore, the equity transfer contract (a broad concept) and relevant documents which specify contract price can be treated as taxable document.

ii. Tax on equity transfer

i) Meaning of “used in China”

According to the Stamp Duty Law, documents concluded in China or documents concluded out of China but is used in China are taxable documents. What is the meaning of “used in China” when the document concluded out of China?

Broadly speaking, if the contract has connections in China, the contract can be considered as “used in China”. But what is the scope of “use”? According to the Civil Procedure Law of China and the Interpretation of the Supreme People’s Court of Several Issues concerning the Enforcement Procedures in the Application of the Civil Procedure Law of China, as to the contract disputes jurisdiction, if the jurisdiction can be determined in accordance with the contract when the lawsuit is filed, the jurisdiction will be decided by the contract. If the agreed jurisdiction is not available, the jurisdiction will be determined in accordance with relevant provisions of the Civil Procedure Law of China.  

Since tax payment and collection is not naturally civil rights and obligations and therefore cannot be decided at the parties’ discretion, the contract clause should not determine whether the contract is “used in China”. Referring to relevant provisions of the Civil Procedure Law of China and the Interpretation of the Supreme People’s Court of Several Issues concerning the Enforcement Procedures in the Application of the Civil Procedure Law of China on the agreed jurisdictions and statutory jurisdiction, domicile of transferor and/or transferee, place of contract execution, place of contract performance, place of target share, location of detainable property, place of conduct of tort etc., which have actual connections with the contract, could be used to determine whether the contract is “used in China”.  

ii) Chinese connections for equity transfer

Equity transfer can be classified into five types considering different forms of transaction. Details can be found in the chart below:

When an overseas company sells equity of an overseas company to a Chinese company, or overseas company purchases equity of an overseas company from a Chinese company, the target equities are outside China. Places that have actual connections to China can be used to determine whether the contract is “used in China”.

How to make judgment whether China has connection when a Chinese company purchases or sells equity of an overseas company?

It is not disputable that China has connection in contract provided a Chinese company directly purchases or sells equity of an overseas company. The problem is Chinese companies usually do the overseas equity selling and purchase through overseas SPVs under their control for tax reasons.

In case a Chinese company undertakes equity transaction through overseas SPV, whether determination of Chinese connection shall follow logic of ODI filing or approval?  Overseas investment, which shall go through ODI filing or approval procedure according to relevant laws and regulations, means the investment activities where an enterprise in the territory of China, directly or through an overseas enterprise controlled by it, acquires overseas any ownership, right of control, right of business management, or other relevant rights and interests. Control refers to the direct or indirect holding of more than half of the voting rights of an enterprise or the capability of dominating the operation, finance, personnel, technology, and other major matters of the enterprise though not holding more than half of the voting rights. To be reminded, the ODI filing or approval procedure also covers investment by controlling an overseas enterprise or asset by an agreement, a trust, or any other means.

Since Chinese companies purchase or sell equity of overseas companies through overseas SPV controlled by them, can it infer equity transfer undertaken outside China has connection in China? From perspective of principle of substance over form, it maybe yes. On the contrary, if the overseas Chinese subsidiary is not controlled by the Chinese company, China hardly has any connection on such equity transaction. Notwithstanding the aforesaid, it is suggested to be conservative to apply principle of substance over form on the international equity transactions.  In addition, in respect of contract performance, China may not have connections as the equity transfer is between/among overseas companies.

In general, the Stamp Duty Law follows trend of history. Promulgation and implementation of the law will add bright color to the economic development.

About the Author

Min Liao

Partner at Shanghai Landing Law Offices

L.L.M in Taxation at Boston University, Certified Tax Advisor and Certified Enterprise Legal Council

Ms. Liao was an attorney of law in Shanghai Allbright Law Offices, and worked as deputy legal director and senior tax manager in share listing companies and a tax manager in a big four accounting firm.

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