Editor's Note: In recent years, with the continuous development of the capital market, equity adjustments without premium within enterprises have frequently occurred to meet specific strategic or listing management requirements. As no special tax treatment policy has been introduced for equity adjustments involving individuals, transactions such as an individual shareholder transferring equity at par value often carry significant tax risks with considerable uncertainty. In such transactions, the determination of the transfer price, the justifiable reasons for a par-value transfer, and the legal consequences of an unfair pricing have always been focal points in practice for both tax authorities and taxpayers. This article takes a typical case as an entry point to analyze and evaluate the above disputes, providing suggestions for taxpayers to avoid and resolve similar controversies.

I. Case Introduction

Mr. Zhang held 100% equity of Company A, with an initial investment cost of RMB 5 million (i.e., RMB 1 per share, totaling 5 million shares). In June 2025, Mr. Zhang transferred his entire 100% equity of Company A to B Co., Ltd., a company wholly owned by himself (Mr. Zhang holds 100% equity of Company B), at a price of RMB 5 million. The parties signed an equity transfer agreement and completed the industrial and commercial change registration. Prior to the transfer, the total owners' equity on Company A's balance sheet was RMB 20 million.

In March 2026, Mr. Zhang received a telephone notice from the tax authority, which identified the underreporting of individual income tax on the equity transfer as a risk indicator and required him to conduct self-inspection and rectification. Mr. Zhang provided the relevant materials of the equity transfer as requested by the tax authority. Upon investigation, the tax authority determined that, pursuant to Article 12 of the "Measures for the Administration of Individual Income Tax on Income from Equity Transfer (For Trial Implementation)" (Public Notice [2014] No. 67 of the State Administration of Taxation, hereinafter referred to as "Notice No. 67"), the equity transfer price in June 2025 was obviously low and without justifiable reasons. Therefore, the tax authority should use the net asset valuation method to determine the equity transfer income based on the net asset value of RMB 20 million. After deducting the equity cost of RMB 5 million and related taxes and fees, the taxable income was RMB 15 million. Subject to the 20% tax rate on property transfer income under the Individual Income Tax Law, the individual income tax payable was RMB 3 million, with late payment surcharges to be imposed starting from July 1, 2026. The tax authority required Mr. Zhang to file the tax return within a specified period.

However, Mr. Zhang argued that the transfer price was equal to the initial investment cost, constituting a par-value transfer without generating any premium, and thus no individual income tax was payable. Consequently, two core disputes arose in this case: whether the equity transfer price was indeed too low and whether there were justifiable reasons for such a price.

II. Analysis of the Core Disputes in This Case

Dispute One: Is the Equity Transfer Price Too Low?

From the perspective of the tax authority, Article 10 of Notice No. 67 explicitly stipulates that equity transfer income shall be determined in accordance with the arm's length principle. Article 12 further provides that if the reported equity transfer income is lower than the corresponding net asset value of the equity, it shall be deemed as "income apparently low". In this case, the transfer income reported by Mr. Zhang was RMB 1 per share, while the net asset value corresponding to the equity was RMB 4 per share. There is a clear discrepancy, and the tax authority initiated the assessment procedure based on this, which is legally grounded.

However, from the taxpayer's standpoint, the issue is not that straightforward. Mr. Zhang transferred the equity to Company B, which is 100% owned by Mr. Zhang himself, meaning the transaction is akin to "moving money from the left pocket to the right pocket." Mr. Zhang remains the actual controller of the subject equity, and control has not been substantially transferred. From the perspective of commercial substance, this transfer did not generate wealth appreciation, yet Mr. Zhang is required to pay individual income tax based on the assessed net asset value, which seems unreasonable. The tax authority focuses on the formal arm's length principle, while the taxpayer emphasizes that control has not changed in substance—this is the root cause of the dispute over the equity transfer price.

Dispute Two: Does the Par-Value Transfer Have Justifiable Reasons?

Given that under Notice No. 67, a par-value transfer touches upon the circumstance of "price apparently low", the tax authority's power to initiate assessed collection is still subject to certain limitations. That is, the second dispute in this case is whether a natural person's transfer of equity at par value to a company wholly owned by himself falls within the scope of "justifiable reasons" as stipulated in Article 13 of Notice No. 67. Article 13 of Notice No. 67 positively lists four circumstances that can be regarded as justifiable reasons: (1) being able to produce valid documents proving that the invested enterprise has been significantly affected in its production and operation due to national policy adjustments, leading to the low-price transfer; (2) inheritance or transfer of equity to a spouse, parents, children, grandparents, grandchildren, siblings, or a person who has a direct obligation to support or provide for the transferor, provided that legally effective identity relationship certificates can be provided; (3) internal transfer of equity held by employees of the enterprise that cannot be transferred externally, as stipulated by relevant laws, government documents, or the company's articles of association, with sufficient materials to prove that the transfer price is reasonable and genuine; (4) other reasonable circumstances where both parties to the equity transfer can provide valid evidence to prove the reasonableness.

In the introduced case, the tax authority's view on this issue is that this equity transfer does not fall within the circumstances positively listed as "justifiable reasons" in Article 13, and therefore does not recognize the par-value transfer. Mr. Zhang transferred equity to Company B, which is not due to national policy adjustments. Moreover, since the transferee Company B is an independent legal entity, it does not fall under the second item (transfer between specific natural persons) nor does it meet the internal transfer of employee shareholding.

From the taxpayer's perspective, although this equity transfer does not fall within the three positively listed circumstances, the fourth item of Article 13 is a catch-all provision, namely "other reasonable circumstances where both parties to the equity transfer can provide valid evidence to prove the reasonableness." The taxpayer can certainly argue that this transfer was for the purpose of optimizing the shareholding structure and achieving group management, with a genuine commercial purpose, not primarily for tax avoidance. The IPO sponsor report of Dingjide disclosed by Haitong Securities in May 2022 indicates that under specific circumstances, tax authorities can recognize that a par-value transfer has justifiable reasons and no tax adjustment is required. This shows that whether a par-value transfer has justifiable reasons depends on whether the taxpayer can provide sufficient evidence to prove its reasonableness and the tax authority's exercise of discretion regarding justifiable reasons.

III. What Tax Risks May Arise If the Tax Authority Determines That the Equity Transfer Pricing Is Not at Arm's Length?

In practice, once the tax authority determines that the pricing of an equity transfer is not at arm's length, the taxpayer will face risks ranging from tax supplements and late payment surcharges to fines and even criminal prosecution.

First, the risk of tax adjustment and late payment surcharges is the most direct and fundamental legal consequence in this case. Pursuant to Articles 11, 12, and 14 of Notice No. 67, where the reported equity transfer income is lower than the corresponding net asset value of the equity, it shall be deemed that the equity transfer income is apparently low; the tax authority has the right to reconfirm the equity transfer income using the net asset valuation method. Meanwhile, according to Article 32 of the Tax Collection and Administration Law, where a taxpayer fails to pay tax within the prescribed time limit, the tax authority shall, in addition to ordering the taxpayer to pay the tax within a specified period, impose a late payment surcharge at a rate of 0.05% per day from the date the tax becomes overdue.

Second, there may also be risks related to tax evasion and penalties. Determining a tax adjustment does not necessarily equate to a finding of tax evasion; there is a fundamental difference in the constituent elements between the two. Under Article 63 of the Tax Collection and Administration Law, a finding of tax evasion requires the taxpayer to have the subjective intent to commit an act, such as "refusing to file a tax return after being notified by the tax authority to do so" or "making a false tax return." In this case, after receiving the notice from the tax authority, Mr. Zhang submitted the relevant materials on time and cooperated with the investigation. Typically, this would only involve paying the supplementary tax and late payment surcharges and should not be directly characterized as tax evasion. Finally, if the unfair pricing conduct reaches a certain level of severity, it may give rise to criminal risks. According to Article 201 of the Criminal Law, where a taxpayer adopts deceptive or concealment means to make a false tax return or fails to make a tax return, and the amount of tax evaded reaches a certain threshold, the conduct may constitute the crime of tax evasion, punishable by fixed-term imprisonment or criminal detention, and a fine.

In the case introduced, if Mr. Zhang fails to carry out self-inspection and rectification in accordance with the tax authority's opinion, the risk department will refer the case to the competent tax authority, which will then formally issue a written notice to Mr. Zhang ordering him to file a tax return within a specified period. If Mr. Zhang still fails to file the tax return and pay the tax within the prescribed period, he will face the risk of being accused of "refusing to file a tax return after being notified to do so"—a form of tax evasion—which would result in serious tax audit and penalty consequences.

IV. Four Lines of Defense Against the Tax Authority's Tax Adjustment

1. Demonstrating "No Premium" Based on the Transaction's Substance and Specific Content

From the perspective of the transaction structure, Mr. Zhang transferred the equity to Company B, which he wholly owns. Before and after the transfer, Mr. Zhang has always held 100% control of Company A, and the actual control rights have not changed in any way. From the perspective of the transaction content, Mr. Zhang initially invested RMB 5 million in Company A, acquiring 5 million shares (i.e., RMB 1 per share). This transfer was also conducted at RMB 1 per share for all equity transferred to Company B, with the transfer price being exactly identical to the initial investment cost, generating no transactional premium. In terms of commercial substance, this transaction constitutes an equity restructuring under common control, rather than a transfer of equity to an external third party, and no value appreciation has occurred.

2. Demonstrating "No Improper Purpose" Based on the Difference in Tax Status Before and After the Equity Transfer

From the perspective of changes in tax status, the transaction arrangement in this case actually places the taxpayer in a more disadvantageous tax position. Specifically, if Mr. Zhang had continued to directly hold equity in Company A as an individual, and Company A were later to be transferred to a third party at a premium, Mr. Zhang would only need to pay individual income tax on the premium portion at a rate of 20% under "income from property transfer." However, in this case, after Mr. Zhang transferred the equity to Company B (a legal entity), if Company B subsequently transfers the equity of Company A to a third party, Company B would first need to pay corporate income tax at a rate of 25%. After-tax profits distributed to Mr. Zhang would then be subject to individual income tax on dividend income at a rate of 20%. This change in tax burden demonstrates that Mr. Zhang's transaction arrangement was not aimed at tax avoidance. On the contrary, this arrangement results in a "tax increase" rather than a "tax reduction" in terms of tax status.

3. Demonstrating "Justifiable Reasons" Based on the Actual Circumstances of the Equity Transfer Transaction

Paragraph (4) of Article 13 of Notice No. 67 provides a catch-all provision, allowing "other reasonable circumstances where both parties to the equity transfer can provide valid evidence to prove the reasonableness" to be regarded as having justifiable reasons. In practice, the Yingkou tax authority, in the pre-IPO equity restructuring of Dingjide, determined that a natural person shareholder's transfer of equity at par value to a company established by himself had justifiable reasons and did not require a tax adjustment. The key factors in the Dingjide case were: the transfer was aimed at optimizing the shareholding structure and preparing for an IPO, had a genuine commercial purpose, and the actual controller did not change before and after the transfer. Therefore, taxpayers may cite the Dingjide case and, in conjunction with the commercial substance of their own transaction, argue for the justifiability of a par-value transfer.

4. Determining Whether the Tax Authority's Tax Adjustment Exceeds the Statute of Limitations

If, in this case, Mr. Zhang can provide evidence that he proactively consulted with the competent tax authority before implementing the equity transfer and completed the tax filing and equity change registration in accordance with the guidance provided by the tax authority, then, pursuant to Article 52 of the Tax Collection and Administration Law, where the taxpayer's failure to pay or underpayment of tax is attributable to the tax authority's fault, the tax authority may demand the taxpayer to pay the supplementary tax within three years, but no late payment surcharge may be imposed. If the underpayment is due to the taxpayer's mistake, such as a miscalculation, the tax authority may recover the tax and impose late payment surcharges within three years; under special circumstances, the recovery period may be extended to five years. However, if Mr. Zhang has engaged in subjective intentional acts such as concealing the true purpose of the transaction or providing false agreements, and the conduct is once characterized as tax evasion, the tax authority may recover the tax, late payment surcharges, and impose penalties at any time, without any limitation period.

V. Conclusion

This case is a typical tax dispute involving the transfer of equity at par value by an individual shareholder, revealing the potential risks associated with par-value transfers under the current tax law framework. It is recommended that taxpayers, prior to executing an equity transfer, fully understand the discretionary practices of the competent tax authority, proactively explain the transaction background and commercial purpose to the competent tax authority, and seek advance confirmation. When claiming that justifiable reasons exist, taxpayers should prepare detailed evidentiary materials to support their assertion. Furthermore, for taxpayers who genuinely need to restructure their equity holding structure, it is advisable to proceed cautiously under the guidance of a professional tax attorney to ensure compliance.