Individuals Subject to IIT Payment When Terminating Investments

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Jul. 29 – Individuals in China who have terminated their investment operations need to pay individual income tax (IIT) on several types of income generated from the investment termination, according to the State Administration of Taxation’s (SAT’s) “Announcement on Issues of Collecting IIT on Funds Individuals Recovered from Termination of Investment Operations (SAT Announcement [2011] No. 41)” issued on July 25.

According to Announcement No. 41, equity transfer income, liquidated damages, indemnification, compensation, and other types of funds an individual receives from invested enterprises, cooperative projects, other investors of the invested enterprises, or operational cooperators of the cooperative project as result of terminating investment, joint venture, operational cooperation and other activities shall all be taxable at the tax rate applicable to “property transfer income,” whose tax rate is 20 percent as stipulated in the IIT Law.

Individuals liable for the aforementioned IIT payment shall calculate the actual amount of their taxable income in accordance to the following formula:

  • Taxable income = The aggregate of equity transfer income, liquidated damages, indemnification, compensation and other types of funds an individual receives – The original actual investment amount and related tax payments

The Announcement has come into force on July 25 and the unsettled related IIT issues prior to the date shall also be treated in line with this Announcement.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China. For advice, please email tax@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

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