Shareholding is a relatively common mode of shareholding in the capital market at present, and the mode of shareholding has been recognized by law according to the relevant provisions of the Civil Code and the Company Law. However, there is no systematic provision in the tax law on the taxation of shareholding, especially on the issue of whether the shareholding is subject to personal income tax, which is still controversial in practice. This article will combine the current legal provisions and IPO cases to put forward three suggestions for readers' reference on the tax-related risks faced by the restoration of nominee shares.

Ⅰ. In practice, there are different judgments on whether the restoration of nominee shares is subject to individual income tax

From the above practice cases can be seen, the proxy share restoration is usually carried out by way of equity transfer, but there is no clear conclusion on whether to pay individual income tax after the transfer of equity, the local tax bureaus are not consistent with the enforcement of the caliber of the tax should not be paid tax, because the proxy share restoration is essentially the termination of the entrusted relationship, the hidden shareholders through the transfer of equity transfer agreement for the registration of shares for the transfer of the shares. The attribution of the shares has never been transferred, so there is no taxable income, and naturally there is no question of payment of personal tax; while those who believe that personal tax should be paid, represented by Xiamen Municipal Taxation Bureau, believe that the restoration of shares held in lieu of shares should be subject to personal income tax in accordance with the "income from the transfer of property". Based on the above differences in practice, the following tax-related risks are faced by the nominalization of hidden shareholders. 

Ⅱ.  the tax-related risks faced by the nominalization of hidden shareholders

(Ⅰ) The law clearly requires that the tax should be paid first and the registration of the change of shareholding should be carried out later

According to Article 15 of the Individual Income Tax Law, in case of transfer of real estate by an individual, the tax authority shall verify the individual income tax payable based on the real estate registration and other relevant information, and the registration authority shall check the tax payment certificate of the individual income tax related to the transfer of the real estate when it handles the transfer registration.

Immediately thereafter, nationwide, a number of local governments have issued express circulars to make clear provisions on the checking of tax-paid certificates for the registration of changes in the transfer of equity by individuals, including Hainan Province, Tianjin, Hunan Province, Shenzhen City of Guangdong Province, Zhuhai City of Guangdong Province, Zhongshan City of Guangdong Province, Qingdao City of Shandong Province, Hefei City of Anhui Province, and Hohhot City of Inner Mongolia, etc. This means that the registration authority of the market entity shall check the individual income tax payment related to the transfer of the equity when the registration authority does not check the individual income tax payment related to the transfer of the equity. This means that the market entity registration authority will not register the change of shareholding for the hidden shareholders without checking the individual income tax fulfillment certificate related to the shareholding transaction. In this situation, how to make the market entity registration authorities and tax authorities recognize the essence of their own equity transactions only in the shareholding restoration, rather than the general sense of the transfer of equity, so as to avoid the payment of a large amount of personal income tax to become the hidden shareholders need to focus on the issue of consideration.

(Ⅱ) Risk of double taxation for legal person holding relationship

When the hidden shareholder is a natural person, the after-tax dividend and bonus income and equity transfer income obtained by the apparent shareholder and transferred to the hidden shareholder do not belong to the income that should be subject to individual income tax as stipulated by the law; however, when the hidden shareholder is an enterprise, according to Article 6 of the Enterprise Income Tax Law, the enterprise's income obtained from various sources in monetary and non-monetary forms is the total amount of income, including other incomes; and Articles 7 and Article 26 of the CIT Law, which set out the statutory non-taxable income and tax-exempt income, respectively. Accordingly, the income derived from the nominee shareholder from the explicit shareholder based on the relationship of proxy holding contract is not statutory non-taxable income and tax-exempt income, and should be subject to enterprise income tax in accordance with the provisions of the Enterprise Income Tax Law.

In practice, there is also a controversial issue, that is, after the explicit shareholders obtain dividends and bonuses, transferred to the hidden shareholders, the hidden shareholders can be applied to the "qualified resident enterprises between the dividends, bonuses and other equity investment income for tax-free income? Xiamen Municipal Taxation Bureau responded, according to the "State Administration of Taxation, Xiamen Municipal Taxation Bureau on the fourth meeting of the 13th CPPCC No. 1112 proposal processing response letter" (Xiamen tax letter [2020] No. 125) of the relevant provisions of the implicit shareholders and explicit shareholders do not constitute an equity investment relationship between the hidden shareholders and explicit shareholders, implicit shareholders from the explicit shareholders of the income is not in line with the definition of the dividends, bonuses, and the definition of income, and there is no provision in the tax law can be "tax-free". The tax law also does not provide for "penetration" as the hidden shareholders to obtain equity investment income tax-free, therefore, when the hidden shareholders are enterprises, there is a risk of double taxation.

(Ⅲ) Judicial decisions cannot counter the inspection and adjustment of the tax authorities

When the conditions are ripe and the hidden shareholders are ready to terminate the escrow agreement, according to the tax law, the income from the transfer of equity is subject to personal income tax, and 20% of the income from the transfer of equity is subject to personal income tax before the registration of the change of shareholders. Among other things, the equity transfer price needs to refer to and be close to the fair value of the equity, and cannot be artificially and arbitrarily priced (except for justifiable reasons, the transfer price cannot be too low), which results in the original shareholders (the hidden shareholders) needing to bear a higher tax burden in the case of a higher equity valuation, whereas if the transfer is made at parity or at "1" yuan, If the transfer is made at par or "$1" or "$0", it is highly susceptible to adjustment by the tax authorities.

In order to mitigate the tax risks in this regard, in addition to applying the provisions of Article 13 of the Measures for Administration of Individual Income Tax on Income from Equity Transfer (for Trial Implementation) (Announcement of the State Administration of Taxation No. 67 of 2014), providing the corresponding bases and reasons, and striving for a low-priced transfer, many of the hidden shareholders have chosen to file a lawsuit for confirmation of their rights in the court, so as to change the equity interests they hold on behalf of the hidden shareholders to their names through the court's judgments or rulings. Through a court judgment or ruling, the shareholding in lieu of the shareholding is directly changed to the name of the hidden shareholder and the shareholding is recognized as owned by the hidden shareholder. The hidden shareholders believe that if they do not transfer the shares through the form of equity transfer, the tax authorities will not regard it as a transfer and will not levy individual income tax.

However, according to the Measures for the Administration of Individual Income Tax on Income from Equity Transfer (for Trial Implementation) (Announcement of the State Administration of Taxation No. 67 of 2014), the equity transfer referred to in these Measures refers to the act of an individual transferring his equity interest to other individuals or legal persons, including the following cases: sale of equity interest; repurchase of equity interest by a company; when the issuer makes its initial public offering of new shares, the shareholders of the investee enterprise will offer the shares held by the investee enterprise to investors in a public offering The shareholders of the investee enterprise will offer their shares to the investors in a public offering; the equity is forced to transfer by judicial or administrative authorities; the equity is used for foreign investment or other non-monetary transactions; the equity is used to offset debts; and other acts of equity transfer. Therefore, the judicial judgment or ruling does not produce the effect of reasonable tax avoidance and cannot counter the inspection and adjustment of the tax authorities, and because of the uncertainty of the result of the judicial decision and the long time spent, it is not common to use litigation to solve the way of proxy shareholding in practice.

Ⅲ. the response of the hidden shareholders recommendations

(Ⅰ) Prudent selection of nominee to reduce the risk from the source

According to Article 13 of the Measures for Administration of Individual Income Tax on Income from Equity Transfer (for Trial Implementation) (State Administration of Taxation Announcement No. 67 of 2014), if a person inherits or transfers the equity interest to his/her spouse, parents, children, grandparents, grandchildren, brothers and sisters who are able to provide proof of legally valid identity relationship, as well as to his/her dependents who have the obligation of direct support or alimony to the transferor or alimony, the income from the transfer of equity is deemed to be justified when it is obviously low. As a result, a nominee subject with private social relations such as relatives, friends or other affiliations with the hidden shareholders tends to be more reliable than a mere business partner, and the kinship relationship can produce tax-saving effects when conducting equity transfers, and the kinship relationship of nominee will be more likely to be considered justifiable when conducting IPO audits.

For example, the operation of Shenzhen New Yichang Technology Co., Ltd. on behalf of the restoration of shares, in March 2016, Yuan Chunli will be held on behalf of Song Changning 45% of the equity of New Yichang Co., Ltd. at a low price of 1 yuan to Song Changning, in essence, the restoration of shares on behalf of the restoration of shares, because of the husband and wife relationship of Yuan Chunli and Song Changning, the tax authorities have not approved the collection.

(Ⅱ) Retain evidence of capital contribution, and strive for substantive taxation

In the legal relationship of equity holding, the actual shareholders for the actual enjoyment of investment income, equity registration by the nominal shareholders to change to the actual shareholders did not change the economic substance, according to the principle of substantive taxation, the above equity changes do not constitute equity transfer, there is no equity transfer income, no need to pay enterprise income tax or personal income tax.

In practice, although the legal relationship of escrow exists objectively, taxpayers are often unable to persuade the tax authorities to tax according to the economic substance due to the lack of sufficient supporting materials, and are eventually forced to accept the decision to pay back tax according to the fair price. Therefore, when signing an equity holding agreement, an oral form of equity holding contract should be avoided. At the same time, it is necessary to specify in writing the respective rights and obligations of the hidden and nominal shareholders, and to state the nature of the capital contribution and the method of payment (to ensure consistency), in order to prove that the hidden shareholders have actually made the capital contribution. In case the hidden shareholder transfers money to the nominee shareholder, the record of the transfer should be kept and the purpose of the money should be stated at the time of the transfer. Apart from that, the hidden shareholders can also prove the actual capital contribution by retaining the vouchers of the actual participation in the profit distribution of the company and other relevant materials, and strengthen the communication with the tax authorities as much as possible to safeguard their legitimate tax-related rights and interests to the greatest extent possible. The aforementioned case of Shenling environment on behalf of the share restoration of the treatment that reflects this point.

(Ⅲ) Reasonable "low price transfer" to realize equity reversion

In the context of the inadequacy of the current legal provisions and the different caliber of tax administration of tax authorities around the world, if it is not possible to realize the "substantive tax", it may be recognized by the tax authorities as "transfer of equity", such as to achieve the transfer of low-priced or flat-price, but also to achieve the return of the shareholding. Reversion.

According to Article 13 of the Announcement of the State Administration of Taxation on the Issuance of Measures for the Administration of Individual Income Tax on Income from Equity Transfer (for Trial Implementation) (Announcement of the State Administration of Taxation No. 67 of 2014), the obviously low income from equity transfer that meets one of the following conditions is deemed to have a justifiable reason: (a) it can be proved by effective documents that the investee enterprise is materially affected in its production and operation due to the adjustment of the national policy, resulting in the transfer of low-priced equity; and resulting in the transfer of equity at a low price; (iii) internal transfer of equity held by employees of the enterprise that cannot be transferred externally at a reasonable and genuine transfer price as stipulated in the relevant laws, government documents or the articles of association of the enterprise and adequately evidenced by the relevant information; and (iv) other reasonable circumstances under which both parties to the equity transfer are able to provide valid evidence to prove its reasonableness. The last touting clause can be utilized by the hidden shareholders in order to prove the reasonableness of the low-priced transaction between the hidden shareholders and the apparent shareholders.

Ⅳ. Summary

In summary, the author recommends that investors revisit the legal risks of equity holdings and minimize the transaction structure of equity holdings. If the transaction arrangement of equity holding is really necessary, it should be prudent to choose the main body of the escrow and limit the main body of the escrow to a specific scope as far as possible, in order to minimize the potential tax risk when the escrow agreement is terminated in the future. If the transaction arrangement of equity holding has already taken place, it should comprehensively collect evidence and materials, and try to pay tax in accordance with the principle of substantive taxation, so as to strive for favorable tax treatment and maximize the protection of its own legitimate tax-related rights and interests.