Editor's Note: Previously, Huatax published an article titled "Case Analysis: How Shareholders Ensure Tax Compliance under the New Company Law," which elaborated on how shareholders can manage tax compliance risks through tax consultation, tax health checks, self-audits, and dealing with tax inspections. With the further escalation of tax risks, tax authorities may impose penalties on shareholders, hold them administratively responsible, or even refer them to public security authorities for criminal liability. Shareholders not only face significant financial burdens but also the possibility of imprisonment. Therefore, resolving tax disputes through dispute resolution mechanisms has become a crucial concern for shareholders. This case will analyze how shareholders can effectively deal with tax disputes through administrative penalty hearings, administrative reviews, administrative litigation, and criminal litigation, thereby mitigating shareholder tax risks.

I. Case Analysis of Administrative Penalty Hearing for Shareholders' Unreturned Loans Crossing Fiscal Years without Declaring Personal Income Tax

1. Overview of the Case

In December 2017, the Tax Inspection Bureau of City F conducted a tax inspection of Company A's tax situation from January 1, 2016, to October 30, 2017. It was discovered that in September 2016, a relative of shareholder Bian borrowed 26.6 million yuan from Company A without interest, with an agreement to repay within 2 years. In June 2017, 10.1 million yuan was repaid, and in November 2017, the remaining 16.5 million yuan was repaid. On May 16, 2018, the Tax Inspection Bureau of City F issued a "Notice of Tax Penalty Matters," determining that the two loans of Company A in 2016 belonged to shareholders and their relatives borrowing from the company for non-business purposes for over a year without repayment. According to the "income from interest, dividends, and bonuses" item, personal income tax should be levied. Company A failed to withhold and pay personal income tax as required. According to Article 69 of the "Tax Collection and Administration Law," it proposed to impose a penalty of 7.98 million yuan, 1.5 times the uncollected personal income tax of 5.32 million yuan on Company A. Bian entrusted a lawyer to assist in handling the case. On May 19, 2018, the lawyer mailed a "Penalty Hearing Application" to the tax authorities, and on June 6 of the same year, the tax authorities held a penalty hearing.

2. Tax Dispute

Company A believed that the "Notice of the Ministry of Finance and the State Administration of Taxation on Standardizing the Management of Personal Income Tax for Individual Investors" (CaiShui [2003] No. 158) did not specify that loans from shareholders' relatives to the company should be regarded as dividends. The tax authority's expansion of the scope of borrowing was unfounded. Furthermore, the 10.1 million yuan loan from Huang did not exceed one year, so personal income tax should not be levied. It was clearly erroneous for the tax authorities to continue to regard the remaining 16.5 million yuan loan as a distribution of dividends to shareholders after the repayment by the borrower.

The tax authority believed that the "Reply of the Ministry of Finance and the State Administration of Taxation on the Issue of Levying Personal Income Tax on Enterprises' Purchase of Houses or Other Properties for Individuals" (CaiShui [2008] No. 83) clearly stated that loans from investors' family members or other personnel outside individual shareholders to enterprises, which were not returned at the end of the fiscal year, should also be regarded as distributions and personal income tax should be levied according to the law. According to Article 2 of No. 158, a fiscal year refers to the period from January 1 to December 31 of the Gregorian calendar. Since the loans from Huang spanned a fiscal year, personal income tax should be levied.

3. Dispute Resolution Path

During the penalty hearing, the lawyer made the following arguments regarding the illegal acts identified by the tax authorities and the evidence submitted:

First, the tax authority did not submit proof of Huang's asset purchase, so No. 83 could not be applied to levy personal income tax.

No. 83 stipulates that loans from family members of shareholders used to purchase assets such as houses for shareholders or family members must be completed and not returned within 12 months to be regarded as dividends to shareholders for the purpose of levying personal income tax. In this case, the tax authority did not submit any proof of Huang's asset purchase, so the provisions of No. 83 could not be applied. Moreover, Article 2 of No. 158 clearly indicates that the subject of adjusting taxation for loans to the company is the shareholder himself, not including his family members or related personnel. Therefore, the tax authority should not levy personal income tax on Huang.

Second, No. 120 clearly defines "end of the fiscal year" as exceeding 12 months.

Regarding the 10.1 million yuan loan repaid by Huang in June 2017, it did not constitute "unreturned loans crossing fiscal years," and did not meet the criteria for dividends. The expression "at the end of the fiscal year" in No. 158 is relatively vague. If the tax authority strictly adheres to the statutory fiscal year and defines it as December 31 of the Gregorian calendar, it will lead to unfairness due to differences in loan timing, resulting in significant tax disputes. To address this issue, "Notice of the State Administration of Taxation on the Issuance of the 'Administration Measures for Personal Income Tax' (State Taxation Letter [2005] No. 120)" clearly defines "end of the fiscal year" as exceeding 12 months. The 10.1 million yuan loan repaid by Huang in June 2017 did not exceed 12 months, and personal income tax should not be levied.

4. Case Implications

First, Risks of Personal Shareholder Loans Unreturned Across Fiscal Years and Unrelated to Company Operations

When personal shareholders borrow from the company for a long time and the loans are not used for company operations, there is a risk of being considered as siphoning off capital from the company, facing fines, or even criminal liability. From a tax law perspective, long-term unreturned shareholder loans pose significant tax risks for both personal shareholders and the companies distributing dividends to them. Personal shareholders face the risk of being retroactively taxed on personal income, while companies face the risk of non-compliance with withholding obligations and being treated as sales, which may lead to tax adjustments by tax authorities and even administrative and criminal liability for tax evasion.

The tax treatment of personal shareholder loans from the company that are considered as dividends for non-business purposes involves various disputes in practice. Apart from the two points mentioned above, other issues include whether the company should be subject to the restriction of the Company Law's provision of distributing dividends only with profits and how to determine the withholding obligation and withholding methods when deemed as dividends. Since these issues are not clearly defined in practice, both companies and shareholders should be aware of the tax risks of long-term unreturned loans from personal shareholders to the company.

Second, The administrative penalty hearing procedure has unique advantages of being pre-emptive, transparent, and swift

The administrative penalty hearing for tax administration is a statutory procedure in which the tax authorities hold a hearing before they are about to make an administrative penalty decision on taxpayers, withholding obligors, or other tax-related subjects, allowing the parties to fully state, question, and debate the facts and evidence of the case with the tax authorities' investigators. The core purpose of this system is to protect the legal rights of the parties and ensure the legality, fairness, and reasonableness of administrative penalties. The advantage of the administrative penalty hearing system for tax administration is that, as a pre-emptive remedy, it can resolve disputes more quickly and economically compared to administrative reconsideration and administrative litigation, and the damage to taxpayers' rights is relatively small. The parties have the opportunity to directly refute and debate the unfavorable evidence and views put forward by the tax authorities, which not only reflects the principle of equal confrontation between the two sides but is also a key link in maintaining taxpayers' rights, enabling them to actively participate in the decision-making process of administrative penalties. According to the "Administrative Penalty Law" and the "Trial Measures for the Implementation of the Administrative Penalty Hearing Procedure for Tax Administration (Trial)," the administrative penalty hearing for tax administration should be held in public

II. Case Analysis: Administrative Review of Taxation Disputes Arising from Non-Transaction Transfer of Equity by Shareholders

(I) Case Overview

In January 2021, Company A signed an "Investment Promotion Agreement" with a certain street office, stipulating that Company A, upon relocating to the street, could be subject to corporate income tax at a predetermined rate of 10% of taxable income. When distributing profits to shareholders, Company A would deduct the corporate income tax paid and calculate the remaining profit for individual income tax at a rate of 20%. The street office explicitly stated that after Company A paid taxes according to the agreement, it could obtain corresponding tax payment certificates and guaranteed that Company A would not be subject to back taxes, late fees, or penalties, ensuring a smooth clearance process for Company A. In March 2021, Company A applied for deregistration and was approved. During liquidation, Company A's main asset was its holdings in a listed company, with a value of nearly 600 million yuan. Based on the agreement, Company A's taxable income was over 60 million yuan, requiring payment of over 15 million yuan in corporate income tax and over 9 million yuan in individual income tax. After paying the taxes, Company A completed the deregistration process at the end of March.

From June to October 2021, tax authorities successively conducted tax inspections on Company A and its shareholders and served a "Tax Matter Notice" in 2022, stating: "According to Announcement No. 27 of 2012 of the State Administration of Taxation on Issues Concerning the Determination and Collection of Corporate Income Tax, enterprises specializing in equity (stock) investment business shall not be subject to the determination of corporate income tax." Company A was not allowed to use the predetermined tax method and was required to demand each shareholder to pay over 130 million yuan in corporate income tax and over 80 million yuan in individual income tax. Company A's shareholders applied for administrative review of the "Tax Matter Notice" and appointed lawyers to handle the case.

(II) Taxpayer-Tax Authority Dispute

First, Can Company A apply the predetermined tax method stipulated in the "Agreement"?

Shareholders believe that both parties have agreed in the "Agreement" that Company A can apply the predetermined tax method. The street office promised that Company A would not be subject to back taxes, late fees, or penalties in the future. According to the principle of protection of legitimate expectations, administrative authorities must abide by their commitments and cannot arbitrarily change or revoke legally effective administrative acts.

Tax authorities believe that Announcement No. 27 of 2012 of the State Administration of Taxation has clearly stipulated the circumstances where the predetermined tax method cannot be applied, and this provision applies earlier than the signing of the "Agreement." Therefore, Company A cannot apply the predetermined tax policy.

Second, Can tax authorities recover taxes from shareholders for Company A's tax liabilities?

Shareholders believe that Company A has completed liquidation and deregistration, which was approved by the tax authorities, and therefore, they should not be held liable for further tax payments.

Tax authorities believe that since Company A has been deregistered, its legal person status has been eliminated, and its debt relationships are borne by shareholders proportionally. Therefore, tax authorities have the right to recover taxes from shareholders.

(III) Dispute Resolution Path

After taking over the case, the lawyer communicated with the tax authorities and explained the background of Company A's signing of the "Investment Promotion Agreement" with a certain street office. The street office contacted Company A to facilitate investment attraction and requested Company A to relocate. Regarding the focus of the dispute in this case, the lawyer made the following points:

First, Company A can apply the predetermined tax policy.

Firstly, through tax investigation, it was found that Company A's main assets during liquidation were stocks, but the company had engaged in various asset management operations, not solely specializing in equity investment business. According to the provisions of the Tax Collection and Administration Law, if an enterprise meets the statutory conditions for predetermined tax collection, it can apply the predetermined tax policy according to law. In this case, Company A's records were incomplete, so it could apply the predetermined tax policy. Although Company A did not strictly follow the statutory procedures for predetermined tax collection during the reporting process, there were procedural flaws, which should not affect the substantive rights of the enterprise to apply the predetermined tax collection method.

Second, Tax authorities should not recover taxes from shareholders.

Firstly, Article 20 of the Company Law stipulates that shareholders who abuse the independent legal status and limited liability of the company, evade debts, and seriously damage the interests of company creditors shall assume joint and several liability for the company's debts. However, tax authorities did not provide evidence proving that Company A's shareholders had engaged in behavior abusing the independent legal status and limited liability of the company, so Article 20 should not apply to recover taxes from shareholders.

Secondly, Article 189 of the Company Law states that members of the liquidation team who cause losses to the company or creditors due to intentional or gross negligence shall bear compensation liability. In this case, Company A's shareholders and liquidation team did not engage in such behavior. Specifically, the liquidation team was established in accordance with the law, conducted liquidation work, and submitted a liquidation report to creditors and tax authorities. There was no intentional or gross negligence in the liquidation process, and the process was legal, compliant, transparent, and open. Even if Company A underpaid taxes, tax authorities did not have the right to demand that shareholders bear the tax arrears.

(IV) Case Implications

First, There is controversy over whether non-transaction transfers of equity should be taxed.

In practice, there is controversy over whether non-transaction transfers of equity during the deregistration process should be taxed. Some argue that non-transaction transfers during deregistration do not involve actual trading or changes in ownership rights, and therefore should not be subject to taxation. However, tax authorities often consider non-transaction transfers as part of equity transfers and calculate corporate income tax accordingly.

Second, There is tax risk in applying irregular fiscal returns.

This case also involves the application of local investment promotion policies. With the tightening of policies related to irregular fiscal benefits, there is a risk that such benefits may be invalidated due to conflicts with higher-level laws. Therefore, companies should pay attention to tax compliance issues and the effectiveness and stability of fiscal return policies.

Third, Shareholders may be held liable if a deregistered company has tax liabilities.

At the same time, this case also involves the risk of recovering taxes from shareholders of deregistered companies. Currently, tax authorities usually choose to hold shareholders jointly liable for the debts of deregistered companies, which has sparked controversy. Liquidating and deregistering a company not only does not evade tax liabilities but may also become the root cause of shareholders' joint liability for debts.

Fourth, Administrative review has advantages in professionalism and broad applicability.

Tax administrative review is an important legal remedy that allows parties to raise objections to specific administrative acts of tax authorities and apply for review by higher-level tax authorities. This system provides taxpayers with an effective way to correct improper administrative actions and protect their legitimate rights and interests. With the revision of the Administrative Review Law in 2023, the role of tax administrative review has been further strengthened, and its main role in resolving administrative disputes has been clearly emphasized.

Compared with other mechanisms for resolving tax disputes, administrative review has several advantages: First, it has a wide scope of application. Tax administrative review covers almost all specific administrative acts related to taxation and can even review abstract administrative acts. This broad scope allows taxpayers to seek help through administrative review when facing various tax issues. In addition, administrative review not only focuses on the legality of administrative acts but also considers their rationality, which is a unique advantage that other dispute resolution systems do not have. Secondly, it has professionalism in dispute resolution. The staff of the higher-level tax authorities who handle reviews usually have extensive experience in tax work and a deep understanding of tax policies and regulations. This enables them to handle tax disputes more professionally and efficiently. Taxpayers can expect fair hearings based on professional knowledge and experience.

III. Case Analysis: Tax Litigation Arising from Undeclared Taxation on Equity Adjustment Performance-Based Agreements

(I) Case Overview

In June 2015, Company A entered into a stock transfer agreement with individuals A and B, who transferred their 50% ownership of Company B to Company A for a total price of 29 million yuan. In July 2015, Company B completed the shareholder change registration, with Company A replacing individuals A and B as shareholders. Company A did not withhold and pay personal income tax for individuals A and B. The parties also reached a performance compensation agreement: individuals A and B committed to the net profit of Company B in the year of the stock transfer. If the actual net profit did not meet the forecasted amount, they should compensate Company Z for the shortfall. Due to Company B's failure to achieve the promised net profit in 2015, in July 2016, individual B signed a supplemental agreement with Company A, agreeing to repurchase 40% of Company B's shares held by Company A based on the original stock transfer agreement. Since Company A did not pay the stock transfer price to individual B, individual B did not need to pay repurchase price to Company A in this transaction. In August 2016, Company B completed the shareholder change registration, with Company A and individual B becoming shareholders. In June 2019, Company A once again reached an agreement with individual B, agreeing for individual B to purchase the remaining 60% of Company B's shares held by Company A for 18 million yuan.

In August 2023, the tax authorities issued an "Administrative Penalty Decision" to Company A, determining that Company A should have withheld personal income tax but failed to do so, and imposed a fine of over 3.5 million yuan. Company A disagreed with the tax authorities' penalty decision and applied for administrative reconsideration. The reconsideration authority upheld the tax penalty decision. Therefore, Company A filed an administrative lawsuit with the People's Court.

(II) Taxpayer-Tax Authority Dispute

Company A argues that since the performance-based clauses were not fulfilled, individual B repurchased all of Company B's shares twice in 2016 and 2019, and Company A did not actually acquire the shares of Company B. Therefore, it should not fulfill the obligation of withholding and paying personal income tax. The tax authorities should not split the equity transactions between Company A and individuals A and B, as it violates the principle of economic substance.

The tax authorities argue that the two repurchase transactions by individual B constitute separate stock transfer transactions. Company A obtained the shares held by individuals A and B in 2015, and the economic benefits were realized through other forms of payment, thus it should withhold and pay taxes according to tax laws.

(III) Dispute Resolution Path

Firstly, from the perspective of tax neutrality, tax collection should not change the fair competitive relationship of business, nor should it affect the business decisions of economic entities. In this case, due to the two stock transactions resulting from the equity adjustment performance-based agreement, treating each transaction separately for tax purposes would inevitably affect the parties' transaction arrangements. Therefore, based on the principle of tax neutrality, the autonomous transaction framework set by the parties should be respected, and the aforementioned performance-based transactions should be treated as a single transaction.

Secondly, according to the "Notice of the State Administration of Taxation on Several Issues Concerning the Recognition of Corporate Income Tax Revenue" (GuoShuiHan [2008] No. 875), Article 1 stipulates: "Except as otherwise provided by the Corporate Income Tax Law and its implementing regulations, the recognition of corporate sales revenue must adhere to the principles of accrual accounting and substance over form." It can be seen that tax administration should adhere to the principle of substance over form in taxation, and clarify the actual value and tax base of various gains and losses in performance-based transactions. This requires the overall transaction to be consolidated for calculation. If separate tax treatment is applied, it will lead to improper consequences such as excessive tax burden on some transactions and insufficient tax burden on others. In this case, Company A did not actually acquire the shares, and individuals A and B did not actually receive the consideration paid by Company A. Requiring Company A to withhold and pay personal income tax for individuals A and B would improperly increase Company A's tax burden.

(IV) Case Implications

First, Performance-based agreements can easily trigger tax risks. In practice, tax authorities in some regions adopt a blanket approach to the taxation of equity transfer transactions without distinguishing the commercial and civil transactions behind the equity transfer. This can easily lead to tax risks. When engaging in performance-based transactions, enterprises should actively communicate with local tax authorities to clarify the commercial purposes of the transactions. Particularly in equity adjustment performance-based transactions, shareholders should apply deferred tax preferential policies in a timely manner, and be aware of the risk of tax adjustment or tax evasion if low-priced or zero-priced repurchase transactions are involved.

Second, The number of administrative litigation cases is increasing year by year, and the status of litigation is continuously improving. As an important legal means to resolve administrative disputes, administrative litigation in the tax field—tax administrative litigation system, has shown a significant growth trend in recent years. This system allows parties to file lawsuits with the People's Court for judicial relief when they believe that specific administrative actions of tax authorities infringe upon their legitimate rights and interests.

With the continuous increase in the number of tax administrative litigation cases, the judicial system is gradually optimizing and strengthening relevant judicial forces. Some regions have begun to establish specialized courts to handle tax cases, in order to enhance the professionalism and efficiency of adjudication. For example, on November 28, 2023, the Siming District People's Court of Xiamen City established a panel specifically for hearing tax cases; and on February 23, 2024, the Shanghai Railway Transportation Court also established a specialized tax adjudication tribunal. These measures not only reflect the improved status of tax administrative litigation in the judicial system but also indicate the growing demand for legal services in taxation and the importance attached to the rule of law tax environment by society.

The development of tax administrative litigation not only provides more solid legal protection for taxpayers but also sets clear legal boundaries for the enforcement actions of tax authorities, which helps promote the deepening development of tax legal construction. With the establishment and operation of specialized courts, the quality and efficiency of tax administrative litigation are expected to be further improved, thereby better safeguarding the legitimate rights and interests of taxpayers and promoting the harmonious and stable legal relationships in taxation.

IV. Analysis of Criminal Defense Case for Failure to Report Equity Transfer and Tax Evasion

(I) Case Overview

Company M is primarily engaged in coal mining and sales. In 2014, Individual A transferred their 100% equity in Company M to Individuals B and C without timely reporting or paying personal income tax. In 2022, the tax inspection bureau inspected Individual A's equity transfer and found that Individual A had not reported the income from the equity transfer. Individual A was served with a "Tax Processing Decision" and a "Tax Penalty Decision," which determined that Individual A should pay a tax and surcharge of 53 million yuan for failing to report, constituting tax evasion, and imposed a fine of 0.5 times the amount. Individual A was required to pay the tax, surcharge, and fine within 15 days of receiving the documents. Individual A failed to fully pay the tax and surcharge within the specified time frame, so the inspection bureau transferred the case to the public security bureau on the 16th day after Individual A received the documents. The public security bureau initiated an investigation. During the investigation, Individual A paid the corresponding taxes, surcharges, and fines. Individual A contacted a lawyer to defend the case.

(II) Dispute between Taxpayer and Tax Authority

First, Does Individual A's conduct constitute tax evasion?

Individual A argues that they did not have the subjective intent to evade taxes. The failure to report was due to negligence or objective circumstances, and should not be considered tax evasion.

The tax authority believes that Individual A knowingly and deliberately failed to report their tax obligation, constituting tax evasion.

Second, Did the tax authority make procedural errors in transferring the case to the public security bureau?

Individual A argues that they needed time to raise funds, which led to the inability to fully pay the corresponding taxes, surcharges, and fines within the specified time.

The tax authority believes that both the "Tax Processing Decision" and the "Tax Penalty Decision" clearly stated that Individual A should pay the taxes, surcharges, and fines within 15 days. Since Individual A did not fully pay within the specified period, the tax authority had the right to transfer the case to the public security bureau.

(III) Resolution Path of Disputes

First, Individual A's conduct does not constitute tax evasion.

Article 63(1) of the Tax Collection and Administration Law lists four types of tax evasion behaviors. Individual A, as a natural person, did not engage in "recording or not recording expenses or not recording, under-recording income in the account books," "forging, altering, concealing, or destroying account books or accounting vouchers," or "refusing to declare after being notified by the tax authorities." Since the tax authority did not notify Individual A to pay the corresponding taxes, Individual A did not engage in "refusing to declare after being notified by the tax authorities." Individual A did not make any tax declaration, so there was no "filing false tax returns" behavior. Thus, Individual A's behavior does not meet the objective criteria for tax evasion.

Second, The tax authority made procedural errors in transferring the case to the public security bureau.

Firstly, the tax authority transferred the case to the public security bureau on the 16th day after Individual A received the "Tax Processing Decision" based on Article 73 of the Implementing Regulations of the Tax Collection and Administration Law. However, this provision only specifies the time for paying or remitting taxes and does not clearly state the time when the tax authority can transfer the case, lacking a legal basis for the tax authority to transfer the case.

Secondly, according to the Administrative Reconsideration Law and the Rules for Administrative Reconsideration of Taxation, taxpayers have the right to apply for administrative reconsideration within 60 days from the date they know or should have known about the administrative act. Taxpayers have the right to apply for administrative reconsideration within 60 days of paying taxes, surcharges, or providing corresponding guarantees. After the administrative penalty case is transferred to the judicial authority, criminal liability should be pursued first. The tax authority's transfer of the case to the public security bureau violates legal provisions and deprives Individual A of the right to seek relief.

Lastly, Article 201 of the Criminal Law stipulates the grounds for criminal prevention. On the one hand, it is to ensure the deposit of national tax revenue, and on the other hand, it provides an opportunity for individuals to reform themselves. In this case, the tax authority only gave Individual A 15 days to pay the taxes, surcharges, and fines, which was difficult for Individual A to achieve. This not only fails to safeguard the state's tax revenue rights but also contradicts the legislative intent of Article 201.

(IV) Case Implications

First, Shareholders should pay attention to tax compliance when transferring equity.

Shareholders must pay close attention to tax compliance when engaging in equity transfer and other economic activities. With the strengthening of tax authorities' supervision over tax-related violations in equity transfer, shareholders should ensure compliance with relevant tax laws and regulations during transactions to timely and accurately fulfill tax declaration and payment obligations to effectively reduce potential tax risks.

Second, Timely handling of tax evasion cases to avoid the risk of criminal transfer.

When facing tax-related administrative disputes, taxpayers should actively exercise their administrative remedies, engage in dialogue with tax authorities, and seek reasonable and effective solutions within the statutory procedures to safeguard their legitimate rights and interests. Especially in cases of tax evasion, taxpayers should understand their legal status and rights, raise objections or apply for reconsideration promptly to reduce legal risks.

Third, Seek professional assistance promptly for cases transferred to public security.

For cases already transferred to the public security bureau, individuals should promptly formulate response strategies. In such situations, it is crucial to engage professional lawyers to provide legal support. Lawyers can assist individuals in conducting in-depth analysis of the case, presenting reasonable defense arguments, and striving for the best legal outcome. Through professional legal services, individuals can better cope with criminal litigation and protect their rights from undue infringement.

Case Analysis: How Shareholders Deal with Tax Disputes under the New Company Law?

Editor's Note: Previously, Huatax published an article titled "Case Analysis: How Shareholders Ensure Tax Compliance under the New Company Law," which elaborated on how shareholders can manage tax compliance risks through tax consultation, tax health checks, self-audits, and dealing with tax inspections. With the further escalation of tax risks, tax authorities may impose penalties on shareholders, hold them administratively responsible, or even refer them to public security authorities for criminal liability. Shareholders not only face significant financial burdens but also the possibility of imprisonment. Therefore, resolving tax disputes through dispute resolution mechanisms has become a crucial concern for shareholders. This case will analyze how shareholders can effectively deal with tax disputes through administrative penalty hearings, administrative reviews, administrative litigation, and criminal litigation, thereby mitigating shareholder tax risks.

I. Case Analysis of Administrative Penalty Hearing for Shareholders' Unreturned Loans Crossing Fiscal Years without Declaring Personal Income Tax

1. Overview of the Case

In December 2017, the Tax Inspection Bureau of City F conducted a tax inspection of Company A's tax situation from January 1, 2016, to October 30, 2017. It was discovered that in September 2016, a relative of shareholder Bian borrowed 26.6 million yuan from Company A without interest, with an agreement to repay within 2 years. In June 2017, 10.1 million yuan was repaid, and in November 2017, the remaining 16.5 million yuan was repaid. On May 16, 2018, the Tax Inspection Bureau of City F issued a "Notice of Tax Penalty Matters," determining that the two loans of Company A in 2016 belonged to shareholders and their relatives borrowing from the company for non-business purposes for over a year without repayment. According to the "income from interest, dividends, and bonuses" item, personal income tax should be levied. Company A failed to withhold and pay personal income tax as required. According to Article 69 of the "Tax Collection and Administration Law," it proposed to impose a penalty of 7.98 million yuan, 1.5 times the uncollected personal income tax of 5.32 million yuan on Company A. Bian entrusted a lawyer to assist in handling the case. On May 19, 2018, the lawyer mailed a "Penalty Hearing Application" to the tax authorities, and on June 6 of the same year, the tax authorities held a penalty hearing.

2. Tax Dispute

Company A believed that the "Notice of the Ministry of Finance and the State Administration of Taxation on Standardizing the Management of Personal Income Tax for Individual Investors" (CaiShui [2003] No. 158) did not specify that loans from shareholders' relatives to the company should be regarded as dividends. The tax authority's expansion of the scope of borrowing was unfounded. Furthermore, the 10.1 million yuan loan from Huang did not exceed one year, so personal income tax should not be levied. It was clearly erroneous for the tax authorities to continue to regard the remaining 16.5 million yuan loan as a distribution of dividends to shareholders after the repayment by the borrower.

The tax authority believed that the "Reply of the Ministry of Finance and the State Administration of Taxation on the Issue of Levying Personal Income Tax on Enterprises' Purchase of Houses or Other Properties for Individuals" (CaiShui [2008] No. 83) clearly stated that loans from investors' family members or other personnel outside individual shareholders to enterprises, which were not returned at the end of the fiscal year, should also be regarded as distributions and personal income tax should be levied according to the law. According to Article 2 of No. 158, a fiscal year refers to the period from January 1 to December 31 of the Gregorian calendar. Since the loans from Huang spanned a fiscal year, personal income tax should be levied.

3. Dispute Resolution Path

During the penalty hearing, the lawyer made the following arguments regarding the illegal acts identified by the tax authorities and the evidence submitted:

First, the tax authority did not submit proof of Huang's asset purchase, so No. 83 could not be applied to levy personal income tax.

No. 83 stipulates that loans from family members of shareholders used to purchase assets such as houses for shareholders or family members must be completed and not returned within 12 months to be regarded as dividends to shareholders for the purpose of levying personal income tax. In this case, the tax authority did not submit any proof of Huang's asset purchase, so the provisions of No. 83 could not be applied. Moreover, Article 2 of No. 158 clearly indicates that the subject of adjusting taxation for loans to the company is the shareholder himself, not including his family members or related personnel. Therefore, the tax authority should not levy personal income tax on Huang.

Second, No. 120 clearly defines "end of the fiscal year" as exceeding 12 months.

Regarding the 10.1 million yuan loan repaid by Huang in June 2017, it did not constitute "unreturned loans crossing fiscal years," and did not meet the criteria for dividends. The expression "at the end of the fiscal year" in No. 158 is relatively vague. If the tax authority strictly adheres to the statutory fiscal year and defines it as December 31 of the Gregorian calendar, it will lead to unfairness due to differences in loan timing, resulting in significant tax disputes. To address this issue, "Notice of the State Administration of Taxation on the Issuance of the 'Administration Measures for Personal Income Tax' (State Taxation Letter [2005] No. 120)" clearly defines "end of the fiscal year" as exceeding 12 months. The 10.1 million yuan loan repaid by Huang in June 2017 did not exceed 12 months, and personal income tax should not be levied.

4. Case Implications

First, Risks of Personal Shareholder Loans Unreturned Across Fiscal Years and Unrelated to Company Operations

When personal shareholders borrow from the company for a long time and the loans are not used for company operations, there is a risk of being considered as siphoning off capital from the company, facing fines, or even criminal liability. From a tax law perspective, long-term unreturned shareholder loans pose significant tax risks for both personal shareholders and the companies distributing dividends to them. Personal shareholders face the risk of being retroactively taxed on personal income, while companies face the risk of non-compliance with withholding obligations and being treated as sales, which may lead to tax adjustments by tax authorities and even administrative and criminal liability for tax evasion.

The tax treatment of personal shareholder loans from the company that are considered as dividends for non-business purposes involves various disputes in practice. Apart from the two points mentioned above, other issues include whether the company should be subject to the restriction of the Company Law's provision of distributing dividends only with profits and how to determine the withholding obligation and withholding methods when deemed as dividends. Since these issues are not clearly defined in practice, both companies and shareholders should be aware of the tax risks of long-term unreturned loans from personal shareholders to the company.

Second, The administrative penalty hearing procedure has unique advantages of being pre-emptive, transparent, and swift

The administrative penalty hearing for tax administration is a statutory procedure in which the tax authorities hold a hearing before they are about to make an administrative penalty decision on taxpayers, withholding obligors, or other tax-related subjects, allowing the parties to fully state, question, and debate the facts and evidence of the case with the tax authorities' investigators. The core purpose of this system is to protect the legal rights of the parties and ensure the legality, fairness, and reasonableness of administrative penalties. The advantage of the administrative penalty hearing system for tax administration is that, as a pre-emptive remedy, it can resolve disputes more quickly and economically compared to administrative reconsideration and administrative litigation, and the damage to taxpayers' rights is relatively small. The parties have the opportunity to directly refute and debate the unfavorable evidence and views put forward by the tax authorities, which not only reflects the principle of equal confrontation between the two sides but is also a key link in maintaining taxpayers' rights, enabling them to actively participate in the decision-making process of administrative penalties. According to the "Administrative Penalty Law" and the "Trial Measures for the Implementation of the Administrative Penalty Hearing Procedure for Tax Administration (Trial)," the administrative penalty hearing for tax administration should be held in public

II. Case Analysis: Administrative Review of Taxation Disputes Arising from Non-Transaction Transfer of Equity by Shareholders

(I) Case Overview

In January 2021, Company A signed an "Investment Promotion Agreement" with a certain street office, stipulating that Company A, upon relocating to the street, could be subject to corporate income tax at a predetermined rate of 10% of taxable income. When distributing profits to shareholders, Company A would deduct the corporate income tax paid and calculate the remaining profit for individual income tax at a rate of 20%. The street office explicitly stated that after Company A paid taxes according to the agreement, it could obtain corresponding tax payment certificates and guaranteed that Company A would not be subject to back taxes, late fees, or penalties, ensuring a smooth clearance process for Company A. In March 2021, Company A applied for deregistration and was approved. During liquidation, Company A's main asset was its holdings in a listed company, with a value of nearly 600 million yuan. Based on the agreement, Company A's taxable income was over 60 million yuan, requiring payment of over 15 million yuan in corporate income tax and over 9 million yuan in individual income tax. After paying the taxes, Company A completed the deregistration process at the end of March.

From June to October 2021, tax authorities successively conducted tax inspections on Company A and its shareholders and served a "Tax Matter Notice" in 2022, stating: "According to Announcement No. 27 of 2012 of the State Administration of Taxation on Issues Concerning the Determination and Collection of Corporate Income Tax, enterprises specializing in equity (stock) investment business shall not be subject to the determination of corporate income tax." Company A was not allowed to use the predetermined tax method and was required to demand each shareholder to pay over 130 million yuan in corporate income tax and over 80 million yuan in individual income tax. Company A's shareholders applied for administrative review of the "Tax Matter Notice" and appointed lawyers to handle the case.

(II) Taxpayer-Tax Authority Dispute

First, Can Company A apply the predetermined tax method stipulated in the "Agreement"?

Shareholders believe that both parties have agreed in the "Agreement" that Company A can apply the predetermined tax method. The street office promised that Company A would not be subject to back taxes, late fees, or penalties in the future. According to the principle of protection of legitimate expectations, administrative authorities must abide by their commitments and cannot arbitrarily change or revoke legally effective administrative acts.

Tax authorities believe that Announcement No. 27 of 2012 of the State Administration of Taxation has clearly stipulated the circumstances where the predetermined tax method cannot be applied, and this provision applies earlier than the signing of the "Agreement." Therefore, Company A cannot apply the predetermined tax policy.

Second, Can tax authorities recover taxes from shareholders for Company A's tax liabilities?

Shareholders believe that Company A has completed liquidation and deregistration, which was approved by the tax authorities, and therefore, they should not be held liable for further tax payments.

Tax authorities believe that since Company A has been deregistered, its legal person status has been eliminated, and its debt relationships are borne by shareholders proportionally. Therefore, tax authorities have the right to recover taxes from shareholders.

(III) Dispute Resolution Path

After taking over the case, the lawyer communicated with the tax authorities and explained the background of Company A's signing of the "Investment Promotion Agreement" with a certain street office. The street office contacted Company A to facilitate investment attraction and requested Company A to relocate. Regarding the focus of the dispute in this case, the lawyer made the following points:

First, Company A can apply the predetermined tax policy.

Firstly, through tax investigation, it was found that Company A's main assets during liquidation were stocks, but the company had engaged in various asset management operations, not solely specializing in equity investment business. According to the provisions of the Tax Collection and Administration Law, if an enterprise meets the statutory conditions for predetermined tax collection, it can apply the predetermined tax policy according to law. In this case, Company A's records were incomplete, so it could apply the predetermined tax policy. Although Company A did not strictly follow the statutory procedures for predetermined tax collection during the reporting process, there were procedural flaws, which should not affect the substantive rights of the enterprise to apply the predetermined tax collection method.

Second, Tax authorities should not recover taxes from shareholders.

Firstly, Article 20 of the Company Law stipulates that shareholders who abuse the independent legal status and limited liability of the company, evade debts, and seriously damage the interests of company creditors shall assume joint and several liability for the company's debts. However, tax authorities did not provide evidence proving that Company A's shareholders had engaged in behavior abusing the independent legal status and limited liability of the company, so Article 20 should not apply to recover taxes from shareholders.

Secondly, Article 189 of the Company Law states that members of the liquidation team who cause losses to the company or creditors due to intentional or gross negligence shall bear compensation liability. In this case, Company A's shareholders and liquidation team did not engage in such behavior. Specifically, the liquidation team was established in accordance with the law, conducted liquidation work, and submitted a liquidation report to creditors and tax authorities. There was no intentional or gross negligence in the liquidation process, and the process was legal, compliant, transparent, and open. Even if Company A underpaid taxes, tax authorities did not have the right to demand that shareholders bear the tax arrears.

(IV) Case Implications

First, There is controversy over whether non-transaction transfers of equity should be taxed.

In practice, there is controversy over whether non-transaction transfers of equity during the deregistration process should be taxed. Some argue that non-transaction transfers during deregistration do not involve actual trading or changes in ownership rights, and therefore should not be subject to taxation. However, tax authorities often consider non-transaction transfers as part of equity transfers and calculate corporate income tax accordingly.

Second, There is tax risk in applying irregular fiscal returns.

This case also involves the application of local investment promotion policies. With the tightening of policies related to irregular fiscal benefits, there is a risk that such benefits may be invalidated due to conflicts with higher-level laws. Therefore, companies should pay attention to tax compliance issues and the effectiveness and stability of fiscal return policies.

Third, Shareholders may be held liable if a deregistered company has tax liabilities.

At the same time, this case also involves the risk of recovering taxes from shareholders of deregistered companies. Currently, tax authorities usually choose to hold shareholders jointly liable for the debts of deregistered companies, which has sparked controversy. Liquidating and deregistering a company not only does not evade tax liabilities but may also become the root cause of shareholders' joint liability for debts.

Fourth, Administrative review has advantages in professionalism and broad applicability.

Tax administrative review is an important legal remedy that allows parties to raise objections to specific administrative acts of tax authorities and apply for review by higher-level tax authorities. This system provides taxpayers with an effective way to correct improper administrative actions and protect their legitimate rights and interests. With the revision of the Administrative Review Law in 2023, the role of tax administrative review has been further strengthened, and its main role in resolving administrative disputes has been clearly emphasized.

Compared with other mechanisms for resolving tax disputes, administrative review has several advantages: First, it has a wide scope of application. Tax administrative review covers almost all specific administrative acts related to taxation and can even review abstract administrative acts. This broad scope allows taxpayers to seek help through administrative review when facing various tax issues. In addition, administrative review not only focuses on the legality of administrative acts but also considers their rationality, which is a unique advantage that other dispute resolution systems do not have. Secondly, it has professionalism in dispute resolution. The staff of the higher-level tax authorities who handle reviews usually have extensive experience in tax work and a deep understanding of tax policies and regulations. This enables them to handle tax disputes more professionally and efficiently. Taxpayers can expect fair hearings based on professional knowledge and experience.

III. Case Analysis: Tax Litigation Arising from Undeclared Taxation on Equity Adjustment Performance-Based Agreements

(I) Case Overview

In June 2015, Company A entered into a stock transfer agreement with individuals A and B, who transferred their 50% ownership of Company B to Company A for a total price of 29 million yuan. In July 2015, Company B completed the shareholder change registration, with Company A replacing individuals A and B as shareholders. Company A did not withhold and pay personal income tax for individuals A and B. The parties also reached a performance compensation agreement: individuals A and B committed to the net profit of Company B in the year of the stock transfer. If the actual net profit did not meet the forecasted amount, they should compensate Company Z for the shortfall. Due to Company B's failure to achieve the promised net profit in 2015, in July 2016, individual B signed a supplemental agreement with Company A, agreeing to repurchase 40% of Company B's shares held by Company A based on the original stock transfer agreement. Since Company A did not pay the stock transfer price to individual B, individual B did not need to pay repurchase price to Company A in this transaction. In August 2016, Company B completed the shareholder change registration, with Company A and individual B becoming shareholders. In June 2019, Company A once again reached an agreement with individual B, agreeing for individual B to purchase the remaining 60% of Company B's shares held by Company A for 18 million yuan.

In August 2023, the tax authorities issued an "Administrative Penalty Decision" to Company A, determining that Company A should have withheld personal income tax but failed to do so, and imposed a fine of over 3.5 million yuan. Company A disagreed with the tax authorities' penalty decision and applied for administrative reconsideration. The reconsideration authority upheld the tax penalty decision. Therefore, Company A filed an administrative lawsuit with the People's Court.

(II) Taxpayer-Tax Authority Dispute

Company A argues that since the performance-based clauses were not fulfilled, individual B repurchased all of Company B's shares twice in 2016 and 2019, and Company A did not actually acquire the shares of Company B. Therefore, it should not fulfill the obligation of withholding and paying personal income tax. The tax authorities should not split the equity transactions between Company A and individuals A and B, as it violates the principle of economic substance.

The tax authorities argue that the two repurchase transactions by individual B constitute separate stock transfer transactions. Company A obtained the shares held by individuals A and B in 2015, and the economic benefits were realized through other forms of payment, thus it should withhold and pay taxes according to tax laws.

(III) Dispute Resolution Path

Firstly, from the perspective of tax neutrality, tax collection should not change the fair competitive relationship of business, nor should it affect the business decisions of economic entities. In this case, due to the two stock transactions resulting from the equity adjustment performance-based agreement, treating each transaction separately for tax purposes would inevitably affect the parties' transaction arrangements. Therefore, based on the principle of tax neutrality, the autonomous transaction framework set by the parties should be respected, and the aforementioned performance-based transactions should be treated as a single transaction.

Secondly, according to the "Notice of the State Administration of Taxation on Several Issues Concerning the Recognition of Corporate Income Tax Revenue" (GuoShuiHan [2008] No. 875), Article 1 stipulates: "Except as otherwise provided by the Corporate Income Tax Law and its implementing regulations, the recognition of corporate sales revenue must adhere to the principles of accrual accounting and substance over form." It can be seen that tax administration should adhere to the principle of substance over form in taxation, and clarify the actual value and tax base of various gains and losses in performance-based transactions. This requires the overall transaction to be consolidated for calculation. If separate tax treatment is applied, it will lead to improper consequences such as excessive tax burden on some transactions and insufficient tax burden on others. In this case, Company A did not actually acquire the shares, and individuals A and B did not actually receive the consideration paid by Company A. Requiring Company A to withhold and pay personal income tax for individuals A and B would improperly increase Company A's tax burden.

(IV) Case Implications

First, Performance-based agreements can easily trigger tax risks. In practice, tax authorities in some regions adopt a blanket approach to the taxation of equity transfer transactions without distinguishing the commercial and civil transactions behind the equity transfer. This can easily lead to tax risks. When engaging in performance-based transactions, enterprises should actively communicate with local tax authorities to clarify the commercial purposes of the transactions. Particularly in equity adjustment performance-based transactions, shareholders should apply deferred tax preferential policies in a timely manner, and be aware of the risk of tax adjustment or tax evasion if low-priced or zero-priced repurchase transactions are involved.

Second, The number of administrative litigation cases is increasing year by year, and the status of litigation is continuously improving. As an important legal means to resolve administrative disputes, administrative litigation in the tax field—tax administrative litigation system, has shown a significant growth trend in recent years. This system allows parties to file lawsuits with the People's Court for judicial relief when they believe that specific administrative actions of tax authorities infringe upon their legitimate rights and interests.

With the continuous increase in the number of tax administrative litigation cases, the judicial system is gradually optimizing and strengthening relevant judicial forces. Some regions have begun to establish specialized courts to handle tax cases, in order to enhance the professionalism and efficiency of adjudication. For example, on November 28, 2023, the Siming District People's Court of Xiamen City established a panel specifically for hearing tax cases; and on February 23, 2024, the Shanghai Railway Transportation Court also established a specialized tax adjudication tribunal. These measures not only reflect the improved status of tax administrative litigation in the judicial system but also indicate the growing demand for legal services in taxation and the importance attached to the rule of law tax environment by society.

The development of tax administrative litigation not only provides more solid legal protection for taxpayers but also sets clear legal boundaries for the enforcement actions of tax authorities, which helps promote the deepening development of tax legal construction. With the establishment and operation of specialized courts, the quality and efficiency of tax administrative litigation are expected to be further improved, thereby better safeguarding the legitimate rights and interests of taxpayers and promoting the harmonious and stable legal relationships in taxation.

IV. Analysis of Criminal Defense Case for Failure to Report Equity Transfer and Tax Evasion

(I) Case Overview

Company M is primarily engaged in coal mining and sales. In 2014, Individual A transferred their 100% equity in Company M to Individuals B and C without timely reporting or paying personal income tax. In 2022, the tax inspection bureau inspected Individual A's equity transfer and found that Individual A had not reported the income from the equity transfer. Individual A was served with a "Tax Processing Decision" and a "Tax Penalty Decision," which determined that Individual A should pay a tax and surcharge of 53 million yuan for failing to report, constituting tax evasion, and imposed a fine of 0.5 times the amount. Individual A was required to pay the tax, surcharge, and fine within 15 days of receiving the documents. Individual A failed to fully pay the tax and surcharge within the specified time frame, so the inspection bureau transferred the case to the public security bureau on the 16th day after Individual A received the documents. The public security bureau initiated an investigation. During the investigation, Individual A paid the corresponding taxes, surcharges, and fines. Individual A contacted a lawyer to defend the case.

(II) Dispute between Taxpayer and Tax Authority

First, Does Individual A's conduct constitute tax evasion?

Individual A argues that they did not have the subjective intent to evade taxes. The failure to report was due to negligence or objective circumstances, and should not be considered tax evasion.

The tax authority believes that Individual A knowingly and deliberately failed to report their tax obligation, constituting tax evasion.

Second, Did the tax authority make procedural errors in transferring the case to the public security bureau?

Individual A argues that they needed time to raise funds, which led to the inability to fully pay the corresponding taxes, surcharges, and fines within the specified time.

The tax authority believes that both the "Tax Processing Decision" and the "Tax Penalty Decision" clearly stated that Individual A should pay the taxes, surcharges, and fines within 15 days. Since Individual A did not fully pay within the specified period, the tax authority had the right to transfer the case to the public security bureau.

(III) Resolution Path of Disputes

First, Individual A's conduct does not constitute tax evasion.

Article 63(1) of the Tax Collection and Administration Law lists four types of tax evasion behaviors. Individual A, as a natural person, did not engage in "recording or not recording expenses or not recording, under-recording income in the account books," "forging, altering, concealing, or destroying account books or accounting vouchers," or "refusing to declare after being notified by the tax authorities." Since the tax authority did not notify Individual A to pay the corresponding taxes, Individual A did not engage in "refusing to declare after being notified by the tax authorities." Individual A did not make any tax declaration, so there was no "filing false tax returns" behavior. Thus, Individual A's behavior does not meet the objective criteria for tax evasion.

Second, The tax authority made procedural errors in transferring the case to the public security bureau.

Firstly, the tax authority transferred the case to the public security bureau on the 16th day after Individual A received the "Tax Processing Decision" based on Article 73 of the Implementing Regulations of the Tax Collection and Administration Law. However, this provision only specifies the time for paying or remitting taxes and does not clearly state the time when the tax authority can transfer the case, lacking a legal basis for the tax authority to transfer the case.

Secondly, according to the Administrative Reconsideration Law and the Rules for Administrative Reconsideration of Taxation, taxpayers have the right to apply for administrative reconsideration within 60 days from the date they know or should have known about the administrative act. Taxpayers have the right to apply for administrative reconsideration within 60 days of paying taxes, surcharges, or providing corresponding guarantees. After the administrative penalty case is transferred to the judicial authority, criminal liability should be pursued first. The tax authority's transfer of the case to the public security bureau violates legal provisions and deprives Individual A of the right to seek relief.

Lastly, Article 201 of the Criminal Law stipulates the grounds for criminal prevention. On the one hand, it is to ensure the deposit of national tax revenue, and on the other hand, it provides an opportunity for individuals to reform themselves. In this case, the tax authority only gave Individual A 15 days to pay the taxes, surcharges, and fines, which was difficult for Individual A to achieve. This not only fails to safeguard the state's tax revenue rights but also contradicts the legislative intent of Article 201.

(IV) Case Implications

First, Shareholders should pay attention to tax compliance when transferring equity.

Shareholders must pay close attention to tax compliance when engaging in equity transfer and other economic activities. With the strengthening of tax authorities' supervision over tax-related violations in equity transfer, shareholders should ensure compliance with relevant tax laws and regulations during transactions to timely and accurately fulfill tax declaration and payment obligations to effectively reduce potential tax risks.

Second, Timely handling of tax evasion cases to avoid the risk of criminal transfer.

When facing tax-related administrative disputes, taxpayers should actively exercise their administrative remedies, engage in dialogue with tax authorities, and seek reasonable and effective solutions within the statutory procedures to safeguard their legitimate rights and interests. Especially in cases of tax evasion, taxpayers should understand their legal status and rights, raise objections or apply for reconsideration promptly to reduce legal risks.

Third, Seek professional assistance promptly for cases transferred to public security.

For cases already transferred to the public security bureau, individuals should promptly formulate response strategies. In such situations, it is crucial to engage professional lawyers to provide legal support. Lawyers can assist individuals in conducting in-depth analysis of the case, presenting reasonable defense arguments, and striving for the best legal outcome. Through professional legal services, individuals can better cope with criminal litigation and protect their rights from undue infringement.