Editor's Note: Tax authorities have recently investigated and handled a case involving a partnership enterprise's unlawful use of approved assessment. In this case, the natural person partners were determined by the tax authorities to owe supplementary individual income tax of CNY 333 million, plus corresponding late-payment surcharges. Drawing on this case, this article analyzes the tax treatment of non-trading transfers of listed company shares held through equity holding platforms, whether an approved assessment qualification obtained during the operational period applies to the dissolution and liquidation phase, and whether late-payment surcharges should be levied on the natural person partners under the "distribute-first, tax-later" model — with the aim of providing reference for related practice.

01 Case Introduction

On April 27, 2026, the Third Inspection Bureau of the Kaifeng Municipal Tax Authority (Henan Province) published a typical case of unlawful approved assessment by a partnership enterprise (Tax Inspection Decision No. [2026] 10 of the Third Inspection Bureau of Bian Tax Authority). The entities involved were Henan Partnership Enterprise A (Limited Partnership) and its natural person partner, Mr. Li.

The actual business of this partnership consisted solely of equity investment. In order to secure the lower tax burden available under approved assessment, the enterprise — citing "inadequate accounting records and inability to properly calculate costs and expenses" — first changed its registered business scope to "enterprise management consulting and cultural and creative planning consulting services," and then applied to and obtained from the tax authorities approved assessment status with a deemed taxable income rate of 13%.

In 2021, Henan Partnership Enterprise A's share reduction and dissolution proceedings advanced almost simultaneously. On one hand, it reduced its holdings in a listed company through block trades, generating reduction proceeds of approximately CNY 22.5668 million. On the other hand, it completed an inter-provincial relocation from Shenzhen to Henan in the same year and completed its deregistration in May of that year.

After investigation, the inspection bureau determined that the approved assessment method approved by the tax authorities applies only to operating income derived during the normal course of the enterprise's production and business operations, and does not apply to dissolution and liquidation income. When calculating its taxable income for 2021, Henan Partnership Enterprise A included approximately CNY 2.882 billion in dissolution and liquidation income within the scope of approved assessment — constituting unlawful application of approved assessment and giving rise to the illegal fact of underpayment of individual income tax.

In calculating the tax, the inspection bureau processed the two categories of income separately and then combined them: block trade share reduction proceeds of approximately CNY 226 million were assessed at a 13% deemed income rate to arrive at taxable income of approximately CNY 29.3368 million; the dissolution and liquidation income was confirmed at approximately CNY 2.882 billion, which was ineligible for approved assessment and was required to be included in taxable income in full on an actual basis. The combined taxable income totaled approximately CNY 2.912 billion. Based on Mr. Li's investment ratio of 36.99%, the taxable income attributable to him personally was approximately CNY 1.077 billion, with individual income tax payable of approximately CNY 377 million. After deducting the approximately CNY 44 million already declared and paid, the underpaid individual income tax amounted to approximately CNY 333 million. Accordingly, the inspection bureau ordered Mr. Li to pay the supplementary tax within 15 days of receiving the decision, with a daily late-payment surcharge of 0.05% accruing from the date of the tax delinquency.

This case reveals the tax risks embedded in using a partnership-type equity holding structure to apply for approved assessment by changing the registered business scope, combined with inter-provincial relocation and non-trading share transfers to dismantle the holding platform. The core disputes center on whether dissolution and liquidation income may be subject to approved assessment, and whether the corresponding late-payment surcharges may be levied in accordance with law. The following analysis draws on current tax law provisions and relevant policies.

02 Tax Analysis of Dissolution and Liquidation of Partnership-Type Equity Holding Platforms

(I) The Tax Law Substance of Non-Trading Share Transfers Is "Deemed Sale"

Under Article 3 of the Implementation Rules for Non-Trading Transfer of Securities (Applicable to Inheritance, Donation, and Other Circumstances), non-trading transfers of securities include transfers arising from inheritance, qualifying donations, legally conducted division of marital property, loss of legal person status, and private asset management, as well as other circumstances recognized by the China Securities Regulatory Commission. Although the above circumstances do not involve the transferee paying monetary consideration or other economic benefits to the transferor, they must still be treated as "deemed sales" from a tax law perspective.

From the perspective of securities registration, the direct transfer of listed company shares held by a partnership enterprise to the partners' names upon dissolution and liquidation of the partnership constitutes a non-trading transfer. Although no purchase or sale transaction is involved, a non-trading share transfer results in a substantive change in the ownership of the shares between different parties, and must therefore be treated as a deemed sale in accordance with law. The recognition of the CNY 2.882 billion dissolution and liquidation income in this case is precisely based on this tax law logic.

(II) Tax Treatment of Different Equity Holding Structures in the Dissolution and Liquidation Phase

Before analyzing the core dispute, it is necessary to compare the tax treatment of corporate-type and partnership-type equity holding structures in the dissolution and liquidation phase.

Corporate-type equity holding platforms face a double layer of tax burden upon dissolution and liquidation. At the enterprise level, corporate income tax at 25% must be paid on the liquidation income. At the shareholder level, pursuant to Article 5 of the Notice on Certain Issues Concerning Corporate Income Tax Treatment of Enterprise Liquidation (Cai Shui [2009] No. 60), the remaining assets distributed to shareholders must be recognized at their realizable value or actual transaction price as the tax basis. The portion equivalent to the enterprise's accumulated undistributed profits and surplus reserves calculated in proportion to the shareholder's equity interest is recognized as dividend income and is fully subject to a 20% tax rate; the excess or shortfall between the remaining assets after deducting dividend income and the shareholder's investment cost is recognized as investment transfer income or loss, also subject to a 20% tax rate. In addition, the distribution of shares to shareholders is also subject to value-added tax (at a rate of 6%) and securities transaction stamp duty (at 1‰).

Partnership-type equity holding platforms apply the "distribute-first, tax-later" principle: the partnership itself does not pay income tax, and each partner pays individual income tax directly on his or her allocable share of income. Under Article 16 of the Regulations on the Imposition of Individual Income Tax on Investors of Individually-Owned Enterprises and Partnership Enterprises (Cai Shui [2000] No. 91), the liquidation income of an enterprise shall be treated as annual production and business income, on which the investors are required to pay individual income tax in accordance with law — i.e., the five-bracket progressive tax rates of 5% to 35% apply. The rules for value-added tax and stamp duty treatment are the same as for corporate-type holding platforms.

It can thus be seen that, although partnership-type equity holding platforms are exempt from corporate income tax in the dissolution and liquidation phase, their natural person partners are subject to individual income tax on the liquidation income at a marginal rate of up to 35%. For partnership-type holding platforms that hold substantial listed company equity, dissolution and liquidation proceeds may easily run into hundreds of millions or even billions of RMB, creating an extremely heavy tax burden. This is precisely the internal motivation for seeking approved assessment — the attempt to use a lower deemed income rate to determine taxable income, thereby dramatically reducing the overall tax burden.

In addition, in practice there are two views on the tax item classification of partnership dissolution and liquidation income. One view holds that the "business income" tax item should apply, based on Article 16 of Cai Shui [2000] No. 91, which treats liquidation income as annual production and business income. The other view holds that the "property transfer income" tax item should apply, based on the Announcement on Issues Concerning the Levy of Individual Income Tax on Amounts Recovered by Individuals upon Termination of Investment and Business Operations (State Administration of Taxation Announcement 2011 No. 41). The author's view is that, while the latter constitutes newer law, Cai Shui [2000] No. 91 is a special provision specifically addressing the dissolution of partnership enterprises, and under the principle that special law prevails over general law, it should take precedence. This approach is also consistent with the mainstream practice of tax authorities.

(III) Whether the Approved Assessment Qualification Obtained During the Operational Period Can Extend to the Liquidation Period

The core dispute in this case is whether Henan Partnership Enterprise A's approved assessment qualification — with a 13% deemed income rate, obtained on the grounds of inadequate accounting records during its operational period — may be directly extended to the dissolution and liquidation period, thereby covering the CNY 2.882 billion of liquidation income.

The approved assessment system was established to address tax administration difficulties arising from taxpayers' inadequate accounting records and inability to properly calculate costs and expenses. The method for calculating liquidation income is clearly set out in Article 16 of Cai Shui [2000] No. 91: "Liquidation income refers to the portion of the total fair value of all assets or property of the enterprise at the time of liquidation that exceeds the paid-in capital, after deducting all liquidation expenses, losses, liabilities, and retained profits from prior years." In this case, the shares involved are shares in a listed company with a clear market price available for reference; the transfer price can be determined based on the closing price on the last trading day prior to the non-trading transfer, and the acquisition cost can also be verified through corresponding documents. This demonstrates that the liquidation income can be fully calculated on an actual basis, making it difficult to establish the prerequisite conditions for approved assessment — namely, inadequate accounting and inability to calculate.

Even setting aside the above prerequisite conditions, the approved assessment qualification obtained during the operational period cannot, as a matter of law, automatically extend to the liquidation period. Although Cai Shui [2000] No. 91 and current tax law have not yet made explicit provisions for a "two-period distinction" for tax filings during a partnership enterprise's liquidation period comparable to those under the corporate income tax regime, reference to the institutional logic of corporate income tax is instructive. Under Articles 53 and 55 of the Enterprise Income Tax Law and Article 1 of Guo Shui Han [2009] No. 684, when an enterprise terminates its operations in the middle of a tax year, the date on which liquidation commences serves as the dividing line to legally construct two independent tax periods — the "current operating period" and the "liquidation period" — and the enterprise must file and pay income tax separately for each period, with the liquidation period being treated as a separate tax year for purposes of filing the liquidation income return. The assessment method determination document issued by the tax authorities for the current operating period does not automatically extend to the liquidation period, and the assessment method for the liquidation period must be separately determined.

Based on the foregoing analysis, the tax authorities' approach is clear: the block trade share reduction proceeds of approximately CNY 22.5668 million constitute income from the operational period, when the approved assessment qualification was still valid. Since this qualification was a specific administrative act reviewed and approved by the tax authorities, on which the taxpayer had formed a reasonable expectation of reliance, the inspection bureau recognized the application of approved assessment, reflecting respect for established administrative acts. The approximately CNY 2.882 billion in dissolution and liquidation income, however, arose during the liquidation period, and neither satisfied the prerequisite conditions for approved assessment nor fell within the scope of the approved assessment qualification's validity during the operational period. Including it within the approved assessment framework constituted unlawful application of approved assessment.

03 Whether Late-Payment Surcharges May Lawfully Be Levied in This Case

In this case, the inspection bureau issued a Tax Treatment Decision ordering supplementary payment of taxes and the imposition of late-payment surcharges, without simultaneously issuing a tax administrative penalty decision or characterizing the conduct as tax evasion. As for the obligation to pay supplementary tax, Henan Partnership Enterprise A unlawfully included dissolution and liquidation income within the scope of approved assessment, objectively resulting in underpayment of taxes, and the obligation to pay the supplementary tax is difficult to avoid. However, whether late-payment surcharges may also be lawfully levied merits close scrutiny.

To answer this question, it is necessary first to return to the "distribute-first, tax-later" filing mechanism of partnership enterprises itself. Under Article 20(1) of Cai Shui [2000] No. 91, "Individual income tax payable by investors on production and business income obtained from a partnership enterprise shall be declared and paid by the partnership enterprise to the competent tax authority where the enterprise's actual place of business management is located, and the tax return shall be copied to the investors." This institutional arrangement means that, although the partners are the taxpayers, their individual income tax is not filed directly by them with the tax authorities, but rather is effected through the intermediary mechanism of the partnership enterprise. The underpayment of taxes arises from an error in the assessment method at the partnership enterprise level of filing, not from the direct filing of the partners themselves.

The institutional arrangement whereby a partnership enterprise files and pays taxes on behalf of its partners bears some similarity to the legal relationship in which a withholding agent withholds and remits taxes. The tax obligation belongs to the partners, while the obligation to file and pay is discharged through the partnership enterprise as an assisting party in fulfilling the tax obligation.

Against this background, the relevant provisions of the Reply of the State Administration of Taxation on the Issue of Individual Income Tax That Should Have Been Withheld But Was Not Withheld by Administrative Organs (Guo Shui Han [2004] No. 1199) have important reference value. Article 3 of that document states clearly: "In accordance with the principles of the Law on Tax Administration and Collection, no late-payment surcharge shall be levied on either the taxpayer or the withholding agent for taxes that the withholding agent should have withheld but failed to withhold, regardless of whether the pre-amendment or post-amendment version of the Law on Tax Administration and Collection applies." This means that not only the passive taxpayer is not subject to late-payment surcharges, but even the withholding agent — as the party responsible for filing — is itself not subject to late-payment surcharges either.

Viewed in light of this principle, since the individual income tax of the partners in this case is realized through the partnership enterprise's proxy-filing mechanism, with underpayment occurring at the partnership enterprise's filing level rather than through the partners' direct filing, late-payment surcharges should in principle not be levied against the natural person partners. This is especially so in the case of limited partners (LPs), who are legally not involved in the execution of partnership affairs and have no participation in tax filings whatsoever, with neither knowledge of nor control over the content of the filings — making the application of the spirit of Guo Shui Han [2004] No. 1199 even more direct and compelling.

In March 2025, the Draft Amendments to the Law on Tax Administration and Collection (Solicitation of Public Comments) was released for public comment. Article 41 therein proposed renaming "late-payment surcharges" as "late-payment fees", apparently intending to circumvent the restriction in Article 45 of the Administrative Compulsion Law that late-payment surcharges may not exceed the principal amount. However, the daily rate of 0.05% was not adjusted, the essentially punitive character of the charge remains unchanged, and the circumstances under which late-payment surcharges are not imposed have not been further expanded. The legislative response remains insufficient. From a systemic improvement perspective, this round of amendments should have squarely addressed the issues revealed by this case. The circumstances under which late-payment surcharges are not to be levied, as specified in Article 3 of Guo Shui Han [2004] No. 1199, as well as circumstances analogous thereto, should be codified in the Law on Tax Administration and Collection to prevent the punitive effect of the system from being unduly extended.

04 Conclusion

The conduct at issue in this case occurred in 2021, before the Announcement on the Administration of Individual Income Tax Collection on Business Income from Equity Investments (Ministry of Finance and State Administration of Taxation Announcement 2021 No. 41) had come into force. At that time, establishing partnership-type equity holding platforms in tax-preferential zones and using approved assessment and fiscal return policies for tax planning was still a relatively common practice. However, following the issuance of Announcement 2021 No. 41, individually-owned enterprises and partnership enterprises holding equity investments such as equity interests, shares, or partnership property interests are uniformly required to apply the audit-and-assessment method for individual income tax. This further compressed the scope for partnership-type equity holding platforms to apply approved assessment. Continuing to maintain such holding platforms not only forecloses the previously available tax advantages, but may in fact increase rather than decrease the tax burden due to the layering of structures. Enterprises should closely monitor policy developments and promptly evaluate the reasonableness of their equity holding structures.

In addition, enterprises should be reminded that dissolution and liquidation income is not subject to approved assessment, and the tax authorities are entitled to pursue recovery of the corresponding taxes from the natural person partners of a partnership enterprise — dissolution does not mean the matter is "settled." Enterprises intending to exit the market and complete deregistration should conduct a comprehensive review of whether any historical tax arrears exist, with particular attention to the tax obligations arising from liquidation income — especially the tax law substance of special circumstances such as non-trading transfers — to avoid unduly expanding tax risks.

When facing a tax inspection, enterprises and individuals should carefully assess their own liability and risk exposure, comprehensively gather evidentiary materials, actively cooperate with the tax authorities' investigation and evidence collection, and simultaneously defend and assert their rights in accordance with law. They should also actively seek the professional support and legal remedies available from qualified tax lawyers.