If an enterprise lends funds to shareholders free of charge, will VAT and enterprise income tax be regarded as sales? Are individual shareholders deemed to pay individual income tax as dividends? Do you pay stamp duty?
1. Value-added tax. According to the first paragraph of Article 14 of the Measures for the Pilot Implementation of the Pilot Project of Replacing Business Tax with Value-Added Tax (CS [2016] No. 36), the provision of services provided by units or individual industrial and commercial households to other units or individuals free of charge shall be regarded as sales of services, except for those used for public welfare undertakings or for the public. Therefore, if an enterprise borrows funds to other units or individuals for use free of charge, it should generally be regarded as providing loan services and subject to VAT.
Preferential policies: According to the Notice of the Ministry of Finance and the State Administration of Taxation on Clarifying the Policies of Exemption from VAT for Pension Institutions (CS [2019] No. 20), the Announcement of the Ministry of Finance and the State Administration of Taxation on Extending the Implementation Period of Some Preferential Tax Policies (Announcement No. 6 of 2021 of the Ministry of Finance and the State Administration of Taxation), and the Announcement of the Ministry of Finance and the State Administration of Taxation on Extending the Implementation of Policies such as Exemption of VAT for Medical Services (Announcement No. 68 [2023] of the Ministry of Finance and the State Administration of Taxation), From February 1, 2019 to December 31, 2027, VAT is exempted for free lending of funds between units within an enterprise group (including enterprise groups). That is, although the free lending of funds between units within an enterprise group (including enterprise groups) is also regarded as a sale, it is exempt from VAT.
Note: The VAT exemption is for entities within a corporate group (including corporate groups), not between affiliated enterprises. According to the relevant provisions of the Notice of the State Administration for Market Regulation on Doing a Good Job in Connecting the Cancellation of Four Administrative Licenses and Other Matters such as the Approval and Registration of Enterprise Groups (Guo Shi Jian Qi Zhu [2018] No. 139), from September 1, 2018, enterprises do not need to go through the approval registration of enterprise groups and apply for the Enterprise Group Registration Certificate. The parent company may apply for the use of the word "group" in the name of the enterprise, and publicize the information of the enterprise group to the public through the national enterprise credit information publicity system. Therefore, whether or not an enterprise group member is a member shall be subject to the information publicized by the parent company of the group through the national enterprise credit information publicity system, or the Enterprise Group Registration Certificate that has been obtained.
2. Enterprise income tax. Article 25 of the Regulations for the Implementation of the Enterprise Income Tax Law stipulates that if an enterprise exchanges non-monetary assets, or uses goods, property or services for donations, debt repayment, sponsorship, fundraising, advertising, samples, employee benefits or profit distribution, it shall be regarded as selling goods, transferring property or providing services, unless otherwise stipulated by the competent financial and taxation departments of the State Council. Therefore, the transfer of funds to others free of charge by an enterprise belongs to the labor services in the enterprise income tax (it should be noted that the services in the enterprise income tax include the services and services in the value-added tax) are regarded as sales and need to pay enterprise income tax.
If an enterprise lends funds to shareholders free of charge, is it regarded as a sale for the purposes of enterprise income tax? Not necessarily! If the relationship between the enterprise and the shareholder is a related party, the "special tax adjustment" shall apply to the related party transactions between the affiliated enterprises. According to Article 41 of the Enterprise Income Tax Law, if the business dealings between an enterprise and its related parties do not comply with the arm's length principle and reduce the taxable income or income of the enterprise or its related parties, the tax authorities have the right to adjust it in accordance with reasonable methods. Article 38 of Announcement No. 6 [2017] of the State Administration of Taxation stipulates that, in principle, no special tax adjustment shall be made for transactions between domestic related parties with the same actual tax burden, as long as they do not directly or indirectly lead to a decrease in the overall tax revenue of the state. Two points should be paid attention to in the tax treatment of enterprise income tax for free loans between related parties: first, the actual tax burden of related parties should be the same, for example, the enterprise tax rate of one enterprise cannot be 25% and the enterprise tax rate of one enterprise is 15%; Second, it is only for free lending of funds between domestic related parties, excluding overseas related parties.
3. Individual income tax. If an enterprise lends funds to individual shareholders for a long time without compensation, and does not use them for the production and operation of the enterprise, according to Article 2 of the Notice of the Ministry of Finance and the State Administration of Taxation on Regulating the Collection and Administration of Individual Income Tax for Individual Investors (CS [2003] No. 158), if the individual investor borrows money from the enterprise in which it invests (except for sole proprietorship enterprises and partnership enterprises) during the tax year, and does not return it after the end of the tax year, and does not use it for the production and operation of the enterprise. The unrepaid loans can be regarded as the dividend distribution of the enterprise to individual investors, and the individual income tax is levied according to the item of "interest, dividends and bonus income". In addition, in accordance with the provisions of the Notice of the State Administration of Taxation on Printing and Distributing <个人所得税管理办法>(Guo Shui Fa [2005] No. 120), the management of individual investors' loans from their investment enterprises has been strengthened, and loans with a maturity of more than one year and have not been used for the production and operation of enterprises shall be taxed in strict accordance with the relevant regulations.
4. Stamp duty. According to the Stamp Duty Law of the People's Republic of China, the loan contract shall pay stamp duty at 0.05‰ of the loan amount. Loan contract refers to the loan contract between a banking financial institution, other financial institutions established with the approval of the banking regulatory authority of the State Council, and the borrower (excluding interbank lending). Therefore, the loan contracts signed between enterprises (non-financial institutions) and between enterprises and natural persons do not fall within the scope of stamp duty and do not need to pay stamp duty.
Source: Zhao Hui Shiyan Changwei Tax Agent Office Co., Ltd