Liangmianzhen: Paying 12,974,073.06 RMB Tax at Disposal of Restricted Shares

Posted by on March 6, 2013 under Tax Controversy | Be the First to Comment

Liuzhou Liangmianzhen Co Ltd, as one of original shareholders of CITIC Securities, gained huge profits from the disposal of restricted shares. In 2010, it gained 83.155 million RMB from the sale of 7.913 million shares of CITIC Securities, which far surpassed its annual net profit 10.83 million. In 2011, compared with 177 million RMB profits from the sale of 17.914 million shares, its annual net profit only reached 15.5633 million RMB.
However, in January 2013, the inspect and audit department of State Administration of Taxation issued a Notice on Supervision Opinions of Tax Enforcement in Guangxi Local Taxation Bureau (Du Shen Bian Han [2012] No. 113), which required the company to pay an overdue business tax and its surcharge amounting to 12,974,073.06 RMB owing to its sale of CITIC Securities from 2009 to 2011.
1. Transfer of Equity or Trade of Financial Instruments?
The main issue of this case is whether company’s disposal of restricted shares belongs to transfer of equity or trade of financial instruments. According to Notice on Several Issues on Business Taxes of Equity Transfer (Circular Caishui [2002] No. 191), the transfer of equity is not subject to business tax. However, according to Interim Regulations of the People’s Republic of China on Business Tax, the transaction of marketable securities is subject to business tax and the turnover shall be the balance of the selling prices and the buying prices. Therefore, the nature of the transaction plays an important role in deciding the company’s business tax liability.
2. Coincidences or Trends?
As a matter of fact, Liangmianzhen’s case has already caused heated discussions with respect to the nature of such transactions. And many original shareholders of listed companies are very worried about their own situations since they did not pay any business taxes previously when disposing of their restricted shares.
Sometimes things are not that clear and it still remains to be seen whether Liangmianzhen’s case will eventually develop into a trend or just end up with a simple coincidence. However, one thing for sure is that many hidden problems may be revealed under stringent inspections carried out by tax authorities. Therefore, Hwuason Lawyers suggest company pay special attentions to any tax inspections and communicate with tax authorities to settle potential disputes. In addition, company may also resort to tax professionals’ advisories which may provide practical resolutions for company to handle tough tax issues and meanwhile reduce the company’s potential tax risks.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu ( or Lingyan Hu ( You can visit our website at or our tax blog at

About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

Nokia: Raided After Allegations of $543 Million in Unpaid Taxes

Posted by on January 22, 2013 under Tax Controversy | Be the First to Comment

Nokia, Finnish phone maker, was raided by Indian tax officials on January 8th of its production unit in the southern city of Chennai, one of the company’s biggest facilities. And it was alleged by a senior Indian tax official that the investigation related to allegations that Nokia may have evaded around 30 billion rupees ($543 million) in taxes. After the news was released, Nokia shares fell 2.3 percent to 3.20 Euros by 1142 GMT reported by Reuters. PwC, providing auditing and tax services to Nokia in India, was hence called in for questioning on the Nokia tax case by the local authority.
1. Tax disputes are common around the world
Tax disputes are becoming more and more common as governments faced with financial deficits due to the slow economy. As for Nokia’s case, it was suspected a default in tax deducted at source on payments to other countries against software supplies. And prior to Nokia’s case, Vodafone, British telecommunications carrier, was also pressed for payment of $2 billion in disputed taxes in India on its previous acquisition of mobile telecom assets. Therefore, it is simply impossible for company to avoid tax disputes during its operation. The only solution to facing such situation is to deal with it wisely.
2. You don’t intend to evade tax doesn’t mean you are not
Tax is a highly complex issue with numerous articles and documents. If certain conditions are met according to a certain article of the tax law, a company can soon be involved in investigations and may later be accused of evading tax regardless of its intention. As in this case, the relevant person in charge said that it always observes “applicable laws and rulings in the countries where we operate”. However, it was still involved in tax evasion charges and it remained unclear how this would affect the productivity of the factory. We have just seen too many “innocent” companies trapped in tax disputes owing to a variety of reasons. And we, Hwuason Lawyers, suggest company pay special attention to the tax issues and comply with the tax law to secure the best outcome.
3. Struggle for you own legal rights
Sometimes the tax law is quite confusing actually and company doesn’t know what to do. A natural idea that a company may come up with is to resort to the local tax authority for advice. In fact, the local tax authority is not necessarily right all the time and may not always favor the taxpayers since it needs to gain revenues. So the best solution for a company to defense its legal rights is to seek a tax lawyer’s advice since he is sure to act on behalf of the company’s interests. And the tax authority’s decision may be challenged through legal procedures provide with solid legal basis.

For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu ( or Lingyan Hu ( You can visit our website at or our tax blog at

About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.

Interview by Accounting Messenger on Inbound Enterprise Disputes

Posted by on September 30, 2010 under Hwuason News, Tax Controversy | Be the First to Comment

Liu Tianyong has attended the interview of Accounting Messenger on Inbound Enterprise Disputes with 3 other guests: Yang Mengzhu (Special Researcher at PPLG center of Central South University), Wang Yougui and Ling Yunzhi.

In light of Provisions of the Supreme People’s Court on Several Issues Concerning the Trial of Cases of Disputes Involving Foreign-Funded Enterprises (I) (Draft for Soliciting Opinions), legal application of disputes arised in establishment and alteration process of Inbound Companies has been properly regulated. Liu and other guests explained how such provisions will affect the Inbound Companies, and how the development of legal policy will influence our investment environment. They also discussed the remain defects of the provisions, and gave suggestions for future improvement.

New Compromise & Conciliation system in the Rules for Tax Administrative Review

Posted by on April 27, 2010 under Anti-Avoidance, Tax Controversy | Be the First to Comment

The new Rules for the Tax Administrative Review (Order of SAT [2010] No. 21) (hereinafter the “New Rules”), issued by the State Administration of Taxation (“SAT”), have superseded the Interim Rules for the Tax Administrative Review (Order of SAT No. 8). One of the aims of the New Rules is, arguably, to increase protection of the legal rights of taxpayers and other interested parties. It is also evidence that one purpose is to ensure supervision of the tax authorities so that they lawfully exercise their authority. The New Rules introduce several major modifications to the tax administrative review system, such as the scope of administrative review, rules on admissible evidence and the method of hearings.

However, probably the most significant change is the introduction of a compromise and conciliation system in accordance with Articles 40 and 50 of the New Rules. Whilst negotiation with the tax authorities in China, both prior to commending litigation and during litigation, is already a common practice there were long standing concerns about the legality of such practices and whether agreements that had been reached were, in fact, enforceable. The New Rules seek to provide a stronger legal basis for such practices.

Compromise Agreements

The New Rules outline the requirements for a binding compromise agreement. It is first noted that the content of a compromise agreement shall not damage the interests of the public and/or individuals. Once a compromise agreement has been approved by the relevant administrative review organ, an applicant is not permitted to apply for review on basis of the same fact and reason. However, apart from this, the New Rules do not specifically detail the legal effect of a compromise agreement. There are still concerns as to the extent to which a compromise agreement can be enforced. It is also not clear whether the applicants can revoke a compromise agreement and reapply for review should new evidence come to light. Finally, the New Rules do not outline that the action that can be taken when one party does not meet their obligations under the compromise agreement.

The new Rules represent a significant attempt by the SAT to bring legitimacy and transparency to the tax administrative review system in China. Whether they achieve such an aim is yet to be seen.

Reconciliation and compromise to play a critical role in tax disputes: New Tax Administrative Review Rules issued

Posted by on March 18, 2010 under China Tax, Tax Controversy | Be the First to Comment

On 10th February 2010 the State Administration of Taxation (SAT) issued new Tax Administrative Review Rules (SAT Order [2010] 22) (the “Rules”) providing a comprehensive guideline for tax disputes in China. There are 105 articles in the Rules, which is 53 more articles than was contained in the original. A fundamental component of the new Rules is the introduction of a reconciliation and compromise system. The Rules are operable from 1 April 2010.

Reconciliation and compromise

As introduced by the stakeholder, the added reconciliation and compromise system stipulates the applicable scope and fundamental principle of the reconciliation and compromise. It also designs details of procedures and requirements . The new rules allow the applicant and the respondent to reach a settlement agreement voluntarily and the administrative review shall terminate after permitted by institution of administrative review, however , the applicant shall not apply the administrative review again for the same fact and reason .The institution of administrative review shall conduct the conciliation in accordance with the principle of voluntary.

Other issues

Some of the other more important changes in the Rules include guidance on the admissibility of evidence, a shift from documentary hearings to full public oral hearings, stipulations on which level of local taxation bureaus have jurisdiction for administrative review and a direction that tax authorities of all levels must provide guidance and supervision in respect of tax administrative review.

A translation of the new Rules will be posted on the Hwuason website within the next 7 days.