Editor's Note: In practice, disputes over individual income tax arising from unfulfilled equity transfer agreements are not uncommon. Taking a typical dispute case as the starting point, this article analyzes the determination of the time when individual income tax liability arises in situations where "the agreement is signed but payment is not made", clarifies the boundary between declaration period and tax payment period, and explains the legal prerequisites and applicable conditions for imposing late payment penalties. It aims to provide references for taxpayers to avoid compliance risks and resolve similar disputes.

01 Case Introduction

In April 2023, Mr. Zhang (the transferor) and Mr. Li (the transferee) signed an equity transfer agreement, agreeing that Mr. Zhang would transfer 30% of the equity he held in the target company to Mr. Li at a consideration of RMB 20 million. Due to the failure of both parties to reach an agreement on the profit distribution of the target company's unfinished business, the equity transfer agreement was not actually performed. Mr. Li did not pay any transfer consideration, and Mr. Zhang did not complete the industrial and commercial registration change for the equity. In December 2024, both parties brought the equity transfer dispute to court. Through court mediation, the parties reached a mediation agreement in August 2025, stipulating that Mr. Zhang should first complete the industrial and commercial registration change of the equity on or before September 15, 2025, and Mr. Li should pay the full transfer consideration of RMB 20 million to Mr. Zhang within three days after the completion of the registration.

However, when Mr. Zhang went to the Market Supervision Administration to handle the industrial and commercial registration change and to the tax office to declare individual income tax, the tax officer informed him that the individual income tax involved in his equity transfer should be paid before May 15, 2023, and that late payment penalties would be imposed for the current tax payment. Is the tax officer's claim legitimate? Has Mr. Zhang's equity transfer actually incurred individual income tax late payment penalties? The judgment on these issues lies in clarifying the time when the individual income tax liability for equity transfer arises, and then analyzing the conditions for imposing late payment penalties.

02 Determination of the Time When Individual Income Tax Liability for Equity Transfer Arises

The tax officer's claim that Mr. Zhang should pay the individual income tax on the equity transfer before May 15, 2023, is presumably based on the Measures for the Administration of Individual Income Tax on Equity Transfer Income (Trial Implementation) (State Taxation Administration Announcement No. 67 of 2014, hereinafter referred to as "Announcement No. 67 of 2014"). Article 20 of this announcement stipulates that "In any of the following circumstances, the withholding agent and the taxpayer shall declare and pay tax to the competent tax authority within 15 days of the following month in accordance with the law: (1) The transferee has paid all or part of the equity transfer consideration; (2) The equity transfer agreement has been signed and taken effect; (3) The transferee has actually performed the duties of a shareholder or enjoyed shareholder rights and interests; (4) The judgment, registration or announcement of the relevant national departments has taken effect; (5) The acts specified in Items 4 to 7 of Article 3 of these Measures have been completed; (6) Other circumstances identified by the tax authority that indicate the transfer of equity has occurred." Since the equity transfer agreement between Mr. Zhang and Mr. Li was signed and took effect in April 2023, the tax officer determined that the tax should be paid before May 15, 2023.

However, the author believes that the view of directly equating "declaring and paying tax within 15 days of the following month" in the above clause with the legal time limit for taxpayers to pay tax is a misunderstanding. The core issue lies in accurately distinguishing between two different legal concepts: "declaration period" and "tax payment period".

(1) Announcement No. 67 of 2014 Specifies the Tax Declaration Period

The legislative intent of Article 20 of Announcement No. 67 of 2014 is to clarify the specific circumstances for the occurrence of individual income tax liability on equity transfer and correspondingly set the time limit for handling tax declaration. The expression "declare and pay tax to the competent tax authority within 15 days of the following month" in this clause focuses on "declaration", i.e., requiring the taxpayer to report to the tax authority and complete tax confirmation procedures within the specified time after the tax liability arises. This understanding is consistent with the collection and administration mechanism of individual income tax on equity transfer. According to Article 5 of Announcement No. 67 of 2014, "For individual income tax on equity transfer income of individuals, the transferor of equity shall be the taxpayer, and the transferee shall be the withholding agent." Under the statutory withholding system, the transferee who pays the consideration is the subject responsible for the actual payment of tax. When the transferee pays the equity transfer consideration, it shall perform the withholding obligation in accordance with the law and pay the tax into the treasury. Therefore, the "15th day of the following month" specified in Article 20 of Announcement No. 67 of 2014 is essentially the deadline for completing the tax declaration.

It should be further clarified that the occurrence of tax liability gives rise to two relatively independent legal obligations: one is to complete tax declaration within the specified time, and the other is to pay the full amount of tax due within the specified time. In China's tax collection and administration practice, corporate taxpayers usually adopt a model where the declaration period coincides with the tax payment period. However, for special cases such as individual equity transfer, due to the involvement of the withholding mechanism and the uncertainty of the payment link, the two may be separated. Article 20 of Announcement No. 67 of 2014 only sets a clear time limit for the declaration obligation, but does not set an independent final tax payment deadline for the transferor taxpayer who must pay the tax by himself/herself before that date. Therefore, the declaration deadline cannot be simply equated with the tax payment date. In this case, we should refer to the general provisions of the Individual Income Tax Law to determine the tax payment time.

(2) The Tax Payment Period Shall Be Determined in Accordance with the General Provisions of the Individual Income Tax Law

Since Announcement No. 67 of 2014, as a special provision, does not clarify the specific tax payment period for taxpayers, the general provisions of the Individual Income Tax Law and its supporting regulations shall apply.

Article 24 of the Implementation Regulations of the Individual Income Tax Law stipulates that "When a withholding agent pays taxable income to an individual, it shall withhold or collect tax in accordance with the provisions of the Individual Income Tax Law, pay the tax into the treasury on time, and keep special records for inspection." This indicates that in the presence of a withholding agent, the time for tax payment is closely linked to the payment behavior. On this basis, Article 10 of the Measures for the Administration of Withholding Declaration of Individual Income Tax (Trial Implementation) (State Taxation Administration Announcement No. 61 of 2018) further clarifies that "When a withholding agent pays income from interest, dividends, bonuses, income from lease of property, income from transfer of property, or occasional income, it shall withhold and pay tax in accordance with the law on a transaction-by-transaction or monthly basis." According to this article, for the payment of income from property transfer, the tax payment period is withholding and payment on a transaction-by-transaction or monthly basis. If the withholding agent fails to perform the withholding obligation when making payment, in accordance with Article 13 of the Individual Income Tax Law, "If a taxpayer obtains taxable income and the withholding agent fails to withhold the tax, the taxpayer shall pay the tax by June 30 of the year following the year in which the income is obtained; if the tax authority notifies a time limit for payment, the taxpayer shall pay the tax within that time limit." It can be seen that the withholding agent shall withhold and pay tax on a transaction-by-transaction basis when making payment; if the tax is not withheld at the time of payment, the taxpayer shall pay it by June 30 of the following year.

Specifically in this case, since Mr. Li, the transferee, has never paid the equity transfer consideration, the withholding obligation has not been triggered, and Mr. Zhang has not actually obtained the transfer income. In this situation, neither the provision on transaction-by-transaction withholding nor the situation of payment in the following year as specified in Article 13 of the Individual Income Tax Law applies. During the period when the equity transfer consideration is not paid and the income is not yet realized, although the taxpayer has incurred tax liability, there is no legal obligation or time limit constraint for tax payment.

03 The Tax Authority Should Not Impose Late Payment Penalties on Individual Income Tax for Equity Transfer in This Case

Based on the aforementioned analysis, on the basis of clarifying the time when the individual income tax liability for equity transfer arises and the tax payment period, we further discuss whether the imposition of late payment penalties in this case is legitimate and appropriate.

Article 32 of the Tax Collection Administration Law stipulates that "If a taxpayer fails to pay tax within the specified time limit, or a withholding agent fails to remit the withheld tax within the specified time limit, the tax authority shall order it to pay within a time limit and, starting from the date of the overdue tax, impose a late payment penalty of 0.05% of the overdue tax per day." According to this article, the late payment penalty shall start to accrue from the date on which the specified tax payment period expires. If the taxpayer does not even have a specific tax payment period, naturally no late payment penalty should be imposed. As mentioned earlier, in Mr. Zhang's equity transfer transaction, due to the non-payment of consideration and the non-triggering of the withholding obligation, the specific tax payment period for him as a taxpayer has not been established, so the starting point for calculating the late payment penalty is irrelevant. If the tax authority claims to impose late payment penalties starting from May 15, 2023, it lacks a clear basis for determining the starting date of the period.

Furthermore, Article 3 of the Reply of the State Taxation Administration on Issues Concerning Unwithheld Individual Income Tax by Administrative Organs (State Taxation Administration Letter No. 1199 of 2004) stipulates that "In accordance with the principles specified in the Tax Collection Administration Law, regardless of whether the revised or pre-revised Tax Collection Administration Law applies, the tax authority shall not impose late payment penalties on taxpayers or withholding agents for taxes that should have been withheld but not withheld." In cases where the withholding agent fails to withhold taxes that should have been withheld, the tax authority shall not impose late payment penalties on taxpayers or withholding agents. By applying the principle of "what is permitted for the heavier shall be permitted for the lighter", it is even more inappropriate to impose late payment penalties on taxpayers when the withholding agent has not yet made payment and the withholding obligation has not yet arisen.

In addition, according to the Reply of the State Taxation Administration on Issues Concerning the Levying of Individual Income Tax on Taxpayers Who Recover Transferred Equity (State Taxation Administration Letter No. 130 of 2005), "If the equity transfer contract is not fully performed, and the arbitration commission makes an award to terminate the equity transfer contract and its supplementary agreement, or to stop the performance of the original equity transfer contract, and the transferred equity is recovered at the original price, since the equity transfer has not been completed and the income has not been fully realized, the equity income will cease to exist with the termination of the equity transfer relationship. In accordance with the relevant provisions of the Individual Income Tax Law and the Tax Collection Administration Law, as well as the principle of reasonableness in administrative actions, the taxpayer shall not be required to pay individual income tax." If the tax authority recognizes that no tax is required to be paid after the termination of the agreement, but at the same time claims late payment penalties for unpaid taxes during the term of the agreement, it will form a logical paradox.

In terms of the nature of late payment penalties, they have both compensatory and punitive functions, and their application usually requires the taxpayer to have subjective fault. In this case, Mr. Zhang's failure to pay tax was due to the failure of the equity transfer transaction to be performed as agreed, which was caused by objective obstacles to performance. He had no intention of delaying or evading tax subjectively. Imposing late payment penalties in this situation is not in line with the original intention of the late payment penalty system and violates the basic legal principle of proportionality between liability and punishment.

Based on the above analysis, the tax authority's claim to impose late payment penalties on Mr. Zhang starting from May 15, 2023, lacks sufficient legal and factual basis and cannot be established.

04 Conclusion

In individual equity transfers, the occurrence of tax liability does not directly mean the arrival of the tax payment period, nor does it necessarily trigger liability for late payment penalties. In practice, taxpayers should attach importance to tax compliance arrangements when signing equity transfer agreements, clearly stipulate the method of bearing taxes and fees and payment nodes in the contract, and integrate tax payment with the transaction process as much as possible. For example, it can be agreed that the transferee shall withhold and pay the corresponding tax when paying the first installment of the transfer consideration, or both parties shall jointly complete the tax payment certificate before proceeding with the equity registration change, so as to avoid the risk of late payment penalties arising from performance disputes. If the tax cannot be paid in a timely manner due to performance disputes, the taxpayer should take the initiative to communicate with the tax authority and explain the situation. If the tax authority still insists on imposing late payment penalties and issues relevant documents, the taxpayer may, in accordance with the law, seek assistance from professional tax lawyers and safeguard their legitimate rights and interests through legal channels such as administrative reconsideration or administrative litigation.