On July 11, 2003, the Ministry of Finance and the State Administration of Taxation (SAT) issued the Circular of the Ministry of Finance and the State Administration of Taxation on Regulating the Administration of Individual Investor's Individual Income Tax Collection (Cai Shui [2003] No. 158), which treats the "long-term non-reimbursement of individual shareholders' loans" as a distribution of dividends and bonuses, and collects individual income tax. Although the document has been in force for more than 20 years, there are still big controversies in the implementation, especially in the scope of the borrower, the judgment of the time of occurrence of the tax obligation, the connection with the system of "no profit, no distribution" of the Company Law, and the question of whether to levy tax or refund the tax for the repayment of the borrowed money across the years, etc., the tax authorities around the world have different understandings. This article is intended to analyze the disputes in the application of Circular 158 in the light of four cases and make suggestions for taxpayers to cope with the relevant risks.

Ⅰ. From four cases to see the controversy over the legal application of Article 158

(Ⅰ) the scope of the borrower: shareholders' relatives to the company loans should be tax adjusted?

Case 1: In May 2021, the relatives of Huang, a shareholder of Company A, borrowed 16.5 million RMB from Company A. As of April 17, 2023, when the audit case was filed and examined, the said loan had not yet been returned. The tax authorities considered that according to Article 2 of Circular 158, none of the above amount was used for the production and operation of Company A. It should be regarded as the distribution of dividends and bonuses to the shareholders, and instructed Company A to withhold and pay the dividends and bonuses individual income tax of RMB3.3 million, and imposed a fine of one times of the amount of individual income tax that had not been withheld and paid on behalf of the shareholders, amounting to RMB3.3 million.

Article 1 of Article 158 stipulates the tax treatment of shareholders paying consumer expenses and purchasing family property with enterprise funds for themselves, their family members and their related persons, according to which, Article 158 clearly distinguishes between three types of subjects, namely, shareholders themselves, shareholders' family members and their related persons. article 2 of Article 158 specifies that the main body of the adjustment of tax on borrowings from the company is the shareholders themselves, not including their family members In Article 2 of Article 158, it is clear that the main system of adjusting the tax on loans to the company is the shareholders themselves, excluding their family members and related persons. Therefore, we can only conclude from Article 158 that the shareholder himself should be taxed for the long term non-repayment of the loan. Although on June 10, 2008, the Ministry of Finance and the State Administration of Taxation made the "Reply of the Ministry of Finance and the State Administration of Taxation on the Issues of Individual Income Tax on Enterprises Purchasing Houses or Other Properties for Individuals" (Cai Shui [2008] No. 83), which clarified that the family members of the investor other than the individual shareholders or other personnel of the enterprise borrowed money from the enterprise and the borrowing was not returned at the end of the borrowing year, and the borrowing also needs to be regarded as a distribution and subject to personal income tax according to the law. Distribution, personal income tax according to law. However, the scope of the borrower subject is still clear, i.e. shareholders, shareholders' family members and other personnel of the enterprise. However, in this case, the tax authorities applied Article 158 and expanded the scope of borrowers to include shareholders' "relatives". Therefore, in practice, the shareholders associated persons from the company borrowing there are tax-related risks.

(Ⅱ) The time of occurrence of tax obligations: how long will the shareholder's borrowing exceed the period of time to be adjusted for taxation?

Case 2: In May 2018, Zhang Moumou, a shareholder of Company B, borrowed 2 million yuan from the company, and only repaid 1.4 million yuan after the personal income tax remittance period of the following year, and 600,000 yuan has not yet been returned. The tax authorities considered that Company B had failed to fulfill its withholding obligation, and should pay back the withholding individual income tax of 120,000 yuan, and imposed a fine of 0.5 times the individual income tax it should have withheld, i.e. 60,000 yuan.

In the Individual Income Tax Law, "tax year" refers to the period from January 1 to December 31 of the Gregorian calendar. According to the literal meaning of Article 2 of Article 158, the so-called "the tax year" refers to the year in which the borrowing occurred. In other words, even if the taxpayer borrowed money from the enterprise for non-production and business activities in December of the year, as long as it has not been returned on December 31 of the year, it needs to be treated as distribution. However, the State Administration of Taxation on the issuance of the Notice on Administrative Measures for Individual Income Tax (Guo Shui Fa [2005] No. 120), Article 35 (4) of the provisions of the different, which makes clear that one of the conditions for individual investors to borrow money from their investment enterprises is that the borrowing period is more than one year, in the conditions of the provisions of the shareholders from the date of borrowing from the company for more than one year the day after the occurrence of the tax obligation. However, in the practice of tax enforcement and derived from a new interpretation, such as case two, the tax authorities will shareholders borrowing repayment time node defined as "the next year, the expiration of the individual income tax remittance period," the date, according to the caliber of the law enforcement, the taxpayer borrowed money from the company in that year, the tax obligation to the next year on July 1 to occur. Visible, on the "tax year" of the interpretation of the existence of three different ways to determine, but because the tax authorities around the repayment of time are generally in accordance with the caliber of the implementation of the 158th, taxpayers in order to prevent the tax risk of entanglement, or as far as possible in the year of the borrowing of money to complete repayment by December 31st.

(Ⅲ) Company Law Convergence: Whether it should be subject to the limitation of the provisions of the Company Law on the non-dividend of profits

Case 3: In December 2011, the Inspection Bureau of F Tax Bureau inspected the tax-related situation of Company C from January 1, 2010 to October 30, 2011, and found that there were shareholders of Company C, Bian Mou and Cheng Mou, who had borrowed money that had not been returned at the end of the tax year and had not been used for the production and operation of the enterprise. on May 16, 2016, the Inspection Bureau of F Tax Bureau made a Decision Letter on Tax Processing and a Decision Letter on Administrative Penalty on Taxation, which found that the borrowings of Company C had not been returned at the end of the tax year.  C Company confirmed the fact that Cheng Mou's loan was not returned in the tax year, but claimed that it had no profit to distribute and that the application of Circular No. Cai Shui [2003] 158 by the Inspection Bureau of F Tax Bureau was in violation of the mandatory provisions of the superior law Company Law on profit distribution. The court held that whether Company C had profits to be distributed did not affect the determination that the F Tax Bureau Inspection Bureau regarded the shareholders' loans to it that were not returned within the tax year as dividend distribution from the enterprise to the individual investors when it imposed the administrative penalty under appeal, and did not support Company C's aforesaid claims.

From the standpoint of the enterprise, it was argued that according to Article 166 of the Company Law, if an enterprise has no profit, it is impossible to distribute dividends, and it is impossible to incur individual income tax on dividends and bonuses. However, there are also views that the legal consequences of triggering the shareholder borrowing rule under Article 158 are "deemed" dividend distribution, emphasizing the word "deemed", which has nothing to do with the actual dividend distribution of an enterprise, nor does it have anything to do with whether an enterprise has profits or losses available for distribution. The emphasis is on "deemed". In Case 3, the Court rejected Company C's claim on this basis. Therefore, even if a shareholder borrows money from an enterprise across years, even if the enterprise is actually in a state of loss and does not satisfy the conditions for dividend distribution under the Company Law, it is undeniable that there is a risk that the claim that personal income tax should not be assessed in such a situation will not be supported. In this case, if the other shareholders within the company after the borrowing year to sue the borrowing shareholder and revoke the distribution, the borrowing shareholder repayment can be refunded the personal income tax paid?

(Ⅳ) How to deal with the shareholder's repayment of inter-annual loans?

1.Shareholders return the loan before tax audit

Case 4: In early 2010, Company D borrowed 3 million yuan to its shareholders Su Mou, Hong Mou 2.65 million yuan, Ni Mou 3.05 million yuan, a total of 8.7 million yuan of the above borrowing, in May 2012, the borrowing was not used for the production and operation of Company D. On February 28, 2013, H Taxation Bureau Inspection Bureau of the suspected tax violations of the Company D filed an audit on February 20, 2014, the Company made a "Tax Treatment Decision" on the D On 20 February 2014, Company D was issued a Decision on Tax Treatment, which determined that Company D had under withheld and paid 1.74 million RMB of individual income tax, and ordered Company D to make up for the withholding and payment of the tax. Company D filed a lawsuit against Company D after the administrative reconsideration, and Company D argued that Company D had already confirmed that the borrowings of the three shareholders had been returned to the shareholders during the inspection by the Inspection Bureau of the Tax Bureau and that the borrowers were no longer allowed to receive individual income tax and the borrowings were still regarded as the distribution of dividends from the enterprise to shareholders even after the borrowers had repaid the dividends. It was obviously wrong to levy individual income tax. However, the court held that the shareholders of Company D had borrowed money from Company D for more than one tax year, and the borrowings were not used for the operation of Company D. The Inspection Bureau of the Tax Bureau of H regarded the borrowings which were not returned by the shareholders of Company D for more than one tax year as dividend distribution from Company D to the shareholders, which was in line with the opinions of the Ministry of Finance and the State Administration of Taxation on the treatment of long-term non-repayment of borrowings by individual investors from the invested enterprises, and the decision on the handling of the appealed case was upheld. The decision was upheld.

It can be seen that even if the shareholder has returned the loan, as long as the loan is not used for the production and operation of the enterprise across the year, the tax authorities will still regard the full amount of the loan as a dividend distribution of individual income tax, which may result in the borrowing shareholders have no income but a tax burden.

2.Shareholders return the loan after paying tax

For the taxpayers' rights and interests, attention should be paid to the taxpayers in accordance with the provisions of No. 158 of the individual income tax and return the borrowings in the following years, how to deal with the problem of the paid individual income tax. In this regard, there is no uniform regulation at the national level, although some places have clarified their enforcement caliber, but there are also differences. For example, Article 5 of the Announcement of the Tax Bureau of Guangxi Zhuang Autonomous Region of the State Administration of Taxation on Clarifying Certain Issues of Individual Income Tax (Announcement of the Tax Bureau of Guangxi Zhuang Autonomous Region of the State Administration of Taxation No. 9 of 2018) stipulates that, in the case of the individual income tax levied by an individual investor of an enterprise, a member of the investor's family, or other persons of the enterprise who borrows money from the enterprise across the years, even though the borrowing has been returned after the tax is levied, the tax payment of such act Although the loan has been returned after the tax has been levied, the tax obligation of the act has already occurred and the tax already levied shall not be refunded. The Approval Reply of Hebei Local Taxation Bureau to the Request of Qinhuangdao Municipal Bureau on the Issue of Individual Investor's Borrowing for the Collection of Individual Income Tax (Hebei Local Taxation Letter [2013] No. 68) holds a different viewpoint in this regard, i.e., an individual investor who returns a loan of more than one year obtained from the enterprise in which the individual investor invested is permitted to apply for a refund of the individual income tax that has already been paid in accordance with the dividends and bonuses or a credit against the individual income tax payable in the future. Therefore, due to the inconsistency of the policies implemented in different places, in order to maximize the avoidance of tax risks, taxpayers should try to avoid the year-end pending accounts not to be repaid, and to avoid the tax obligations in the absence of obtaining benefits.

Ⅱ.Individual shareholders borrow from the company and long-term non-repayment of tax-related risks

From the perspective of the company law, some natural person shareholders in the paid-up registered capital, there are in the form of borrowing out of the behavior, if it is borrowed from the company for a long time, and did not put into the production and operation of the enterprise, may be regarded as evasion of capital contribution, may be imposed by the amount of the evasion of the amount of capital of more than five percent of a fine of less than fifteen percent, and even be investigated for the crime of evasion of the criminal responsibility of the crime of capital contribution. In terms of tax law, shareholders borrowing for a long period of time does not pay back to the individual shareholders and the enterprise to which the distribution has a greater risk of tax-related.

(Ⅰ) Individual shareholders: the risk of recovery of personal income tax

According to Article 2 of Circular 158, the recovery of individual income tax from individual shareholders who have borrowed money from enterprises for a long period of time shall meet two conditions: first, the shareholders have borrowed money during the tax year and have not returned it at the end of the tax year; and second, the corresponding borrowings have not been used for the production and operation of the enterprises. If the tax authority confirms that the taxpayer meets the above collection conditions, the unreturned loan can be regarded as dividend and bonus distribution, and the individual income tax can be collected from the taxpayer.

(Ⅱ) Tax-related risks of enterprise loans to individual shareholders

1. Risk of failure to withhold and pay personal income tax on behalf of shareholders

According to Article 9(1) of the Individual Income Tax Law, "Individual income tax shall be payable by the income earner, and the unit or individual who pays the income shall be the withholding agent". If a taxpayer receives dividends or bonus income, the enterprise that distributes the income to the taxpayer as the withholding agent shall withhold and pay the tax on behalf of the taxpayer on a monthly or monthly basis. If the enterprise fails to fulfill the withholding obligation according to the law, according to the provisions of Article 69 of the Tax Collection and Administration Law, the tax authorities shall recover the tax from the taxpayer for the personal income tax not yet withheld, and the enterprise may be liable for a fine of at least 50% and not more than three times of the tax not yet withheld. Moreover, although the provision has made it clear that the object of tax recovery is the taxpayer, there are still tax authorities invoking the Notice of the State Administration of Taxation on the Implementation of the Law of the People's Republic of China on the Administration of Taxation Collection and its Implementing Rules on a Number of Specific Issues (Guoshuifa [2003] No. 47) to require the withholding agent to make up for the withholding and payment of the tax. Therefore, enterprises borrowing from individuals need to be careful to identify their withholding obligations to prevent being penalized and cause economic losses to the enterprise.

2. Risk of providing gratuitous loan services to shareholders being treated as sales

According to the "Business Tax to Value-added Tax Pilot Implementation Measures", Article 14 (1) provides that units or individual business enterprises to other units or individuals to provide services without compensation, in addition to the public welfare or to the public for the object, should be regarded as sales. Accordingly, the enterprise borrows money from shareholders without compensation, that is, the company's funds are occupied by shareholders, the tax authorities are likely to determine that the company provides loan services for shareholders without compensation, and need to be regarded as the "sale of financial services - loan services", and recognize the interest income by calculating the interest rate for the same period announced by the People's Bank of China. The company should recognize the interest income according to the interest rate of the same period published by the People's Bank of China, calculate and pay the value-added tax (VAT), and calculate and pay the enterprise income tax (EIT) according to the relevant provisions of the Enterprise Income Tax Law. This is also because there is a relationship between the enterprise and the shareholders, business transactions between the two subjects, should be consistent with the principle of independent transactions, otherwise the tax authorities have the right to make reasonable adjustments.

Ⅲ. The shareholders borrowing to avoid the risk?

Combined with the foregoing analysis, the shareholders borrowed from the company's main source of tax risk and borrowing period and the use of borrowing in two aspects, then its avoidance of risk should also be cut from these two perspectives.

(Ⅰ) Avoid cross-year borrowing

As mentioned above, the enterprise in the occurrence of borrowing before the end of the year repayment must be the most secure way to avoid tax risk. If individual shareholders really need to borrow, they can also repay the loan before the end of the year and then borrow from the enterprise at the beginning of the following year. If the shareholder has borrowed money across years but can repay all or part of it before the initiation of the tax audit program, the taxpayer should actively communicate with the tax authorities and strive to exclude the repaid portion from the taxable base.

(Ⅱ) Strengthening the management of the use of borrowings

For individual shareholders, if their loans are actually used for company procurement, travel, project investment, etc., they should keep the contracts, purchase invoices, business trip reimbursement documents and other evidence related to economic activities to prove that the loans are used for the production and operation of the enterprise. For enterprises, if they provide shareholders with loans that are not related to production and operation, they should make clear agreements on the interest rate, repayment time and approval procedures of individual shareholders' loans to prevent tax risks.