Through a series of notices, the State Administration of Taxation (SAT) has taken the position that an individual’s contribution of non-monetary assets in exchange for equity is subject to individual income tax (IIT) at the time of contribution to equity. Since the value of such assets may have substantially appreciated, SAT Announcement  No. 20 permits taxpayers to amortize IIT on gains from the appreciation over five years.
An individual’s taxable income from the proceeds of a transfer of property in China is subject to IIT at the rate of 20%, less the original cost, reasonable taxes and expenses. SAT had taken the position in 2005 that appreciation in non-monetary assets, such as shares, founders’ technical achievements and immovable property, that were contributed to equity would not be realized and taxed until the interest in the equity was disposed of or transferred by the taxpayer. From 2008, SAT changed its position to consider non-monetary to be a transfer of property at the time of contribution, and to require IIT to be paid at such time.
Announcement 20 builds on Announcement  No. 67, which clarified issues on equity transfers by individuals, and Circular  No. 41, which required an individual to pay any cash he/she received as part of a contribution toward IIT on the transfer, but permitted the remaining balance to be paid in installments over five years.
Announcement 20 requires the individual to file a report to the relevant tax bureau himself/herself, rather than through a withholding agent. It confirms the formula for calculating IIT and refers to Announcement 67 to calculate original costs. Where the individual cannot properly document costs, the tax bureau may determine them. An individual wishing to pay in installments must provide an installment plan and documents to the tax bureau within 15 days after the month in which the contribution is made.
Individuals who are short of cash and plan to contribute technological developments or other property that may have appreciated substantially in value should prepare a plan and documentation to timely file with the tax bureau to take advantage of the opportunity to spread payments on the IIT on the gain over five years.
Special thanks to Sylvia Zhang of Jaguar Business Consultancy Ltd., Beijing for her research and comments.