Viewpoint... A brief analysis of the common legal and tax risks of shareholders' free transfer of equity.

The system of free transfer of equity is one of the most successful manifestations of the modern corporate system, but excessive freedom also means that there may be higher risks. In the early stage of entrepreneurship, some shareholders often transfer their equity to others at the price of "zero yuan" or "one yuan", most of which are aimed at reducing the cost of equity transfer. However, with the continuous improvement of China's tax system and the increasing intelligence of tax big data, this behavior will undoubtedly lead to more legal risks and tax risks. In judicial cases, shareholders' free disposal of equity may also be recognized as equity gifts. Some views believe that equity gifts are a special form of equity transfer like equity inheritance. In practice, disputes caused by shareholders' transfer of equity with "zero yuan" or "one yuan" are also diverse and complicated. This paper will briefly analyze the legal and tax risks of shareholders' free transfer of equity.

Article 71: Shareholders of a limited liability company may transfer all or part of their shares to each other.

The transfer of equity by a shareholder to a person other than a shareholder shall be subject to the consent of more than half of the other shareholders. Shareholders shall notify other shareholders in writing of their equity transfer to seek consent. If other shareholders fail to reply within 30 days from the date of receiving the written notice, they shall be deemed to have agreed to the transfer. If more than half of the other shareholders do not agree to the transfer, the shareholders who do not agree shall purchase the transferred shares; if they do not, they shall be deemed to have agreed to the transfer.

The other shareholders shall have the preemptive right to purchase the shares transferred with the consent of the shareholders under the same conditions. If two or more shareholders claim to exercise the right of first refusal, they shall negotiate to determine their respective purchase ratios; if they fail to negotiate, they shall exercise the right of first refusal in accordance with their respective proportions of capital contribution at the time of transfer.

Where the articles of association provide otherwise for the transfer of shares, such provisions shall prevail.

Article 137 The shares held by shareholders may be transferred in accordance with the law.

Article 539 stipulates that if the debtor transfers property at an obviously unreasonable low price, assigns another person's property at an obviously unreasonable high price or provides security for another person's debts, which affects the realization of the creditor's claim, if the debtor's counterpart knows or should know the situation, the creditor may request the people's court to revoke the debtor's act.

Article 657 stipulates that a gift contract is a contract in which the donor gives his property to the donee free of charge, and the donee expresses acceptance of the gift.

Article 55 stipulates that the transfer of state-owned assets shall be based on the price assessed in accordance with the law, approved by the institution performing the duties of the investor, or reported by the institution performing the duties of the investor to the people's government at the corresponding level for approval, and the minimum transfer price shall be reasonably determined.

Article 35 The tax authorities shall have the right to determine the amount of tax payable if a taxpayer has one of the following circumstances:

The tax basis declared by the (VI) taxpayer is obviously low and there is no justifiable reason.

Article 11: The competent tax authority may approve the income from equity transfer if one of the following circumstances is met:

(I) declared income from equity transfer is obviously on the low side without justifiable reasons.

Article 13: The income from equity transfer that meets one of the following conditions is obviously low, and it is deemed to be justified:

The (I) can issue valid documents to prove that the production and operation of the invested enterprise has been greatly affected due to the adjustment of national policies, resulting in the transfer of equity at a low price;

The (II) inherits or transfers the equity to the spouse, parents, children, grandparents, grandparents, grandchildren, brothers and sisters who can provide legal proof of identity relationship, and the dependents or supporters who bear the obligation of direct support or maintenance to the transferor;

(III) the provisions of relevant laws, government documents or articles of association of the enterprise, and the relevant information fully proves that the transfer price is reasonable and true for the internal transfer of the non-transferable equity held by the employees of the enterprise;

(IV) other reasonable circumstances under which both parties to the equity transfer can provide valid evidence to prove its reasonableness.

In the event of an equity transfer by a natural person shareholder of a 1. enterprise, before applying to the market entity registration authority for the relevant change registration, the withholding agent and taxpayer of the individual income tax on the equity transfer shall first go to the tax authority to file an individual income tax return.

When the transfer of equity by a natural person shareholder of a 2. enterprise is registered for change, the market entity registration authority shall examine the personal income tax payment certificate related to the equity transaction and register the change in accordance with the law.

The Equity Transfer Agreement signed by the transferor and the transferee only stipulates that the transaction price of the equity is zero yuan, but it does not stipulate whether the nature of the equity disposition is a transfer or a gift, which can be analyzed and demonstrated from the following aspects.

First of all, the value of the company's equity is not necessarily positive or negative. The confirmation of its value needs to consider many factors. For example, the target company has been in a state of loss due to poor management, or even has become insolvent, but the company's brand value is still there, or there is a certain customer base. The transferee and the transferor reach an agreement to transfer the equity at a price of zero yuan, and both parties have no intention of giving, the nature of the equity disposition may be considered as a transfer of equity. Secondly, some views hold that equity should be the general term of shareholders' rights and obligations, and its consideration form is not only currency. In judicial cases, some courts hold that the transferee's transfer of equity does not mean that its assets will inevitably increase, on the contrary, it should also bear the risk of possible losses in the future operation of the target company, and the corresponding responsibility of the transferee is the consideration of the transferred equity. Furthermore, China's Civil Code stipulates that a gift contract is a contract in which the donor gives his property to the donee free of charge, and the donee expresses his acceptance of the gift, and if the words "free of charge" and "gift" do not appear in the contract, it cannot be forcibly speculated that the parties have the intention to conclude a gift contract.

In addition, for the "zero yuan" transfer of equity and "one yuan" transfer of equity, the author believes that it is not a decisive factor in the nature of the determination of the disposition of equity transfer, can be regarded as free, as a symbolic agreement. In judicial practice, some courts believe that the equity transfer price agreed by both parties to the equity transfer is one yuan, not free of charge. For example, the People's Court of Futian District, Shenzhen City, Guangdong Province (2018) Yueyu 0304 Civil Judgment No. 42989, but this view has been rejected by the second-instance judgment.

In summary, it is determined that the nature of the shareholder's disposition of the equity at a price of "zero yuan" should be analyzed and demonstrated in accordance with the background of the transfer transaction, the purpose of the transaction and other aspects.

Article 71 of the Company Law stipulates that shareholders of a limited liability company transfer their equity to a third party other than shareholders, and other shareholders have the legal preemptive right. The legislative intention of this right is that limited liability has the characteristics of human nature. When shareholders transfer their equity to the outside world, they need to join new shareholders, that is, it is possible to break the trust relationship of the original shareholders, while the joint stock limited company with strong capitalization does not have many restrictions.

In practice, it is relatively rare for shareholders to transfer their shares without compensation while internal shareholders do not exercise their priority rights, and it is also controversial whether the system of preferential purchase rights applies to the free transfer of shares by shareholders. Some views believe that the priority "purchase" right is based on paid transfer. If shareholders donate equity to a third party free of charge, there is no "equal condition" for "purchase" of equity, and other shareholders within the company do not enjoy the priority. The right to purchase, as stated in the Civil Judgment No. 588 of Minhang District People's Court (2015) Minmin 2 (Shang) Chuzi, Shanghai. However, most of the view that the establishment of the right of first refusal system is intended to protect the human nature of the limited liability company, the law also does not clearly stipulate that the transfer is paid or free, so the shareholder free transfer of equity should apply the right of first refusal system, that is, the limited liability company shareholders to transfer equity outside the free transfer of equity should be approved by the internal shareholders.

If the shareholder's free transfer of equity causes damage to the creditor, the shareholder's creditor may request the court to revoke the debtor's transfer of equity, because the act may violate Article 539 of the Civil Code, the debtor transfers the property at an obviously unreasonable low price, and affects the realization of the creditor's claim.

Shareholders transfer their equity and dispose of their own property, which does not affect the interests of the creditors of the company to which the subject equity belongs. Therefore, these creditors have not revoked the right to transfer. However, for shareholders who have not fulfilled their capital contribution obligations to transfer their equity, China's law provides other relief channels for debtors.

According to Article 35 of the "the People's Republic of China Tax Collection and Administration Law", if the tax basis declared by a taxpayer is obviously low and there is no justifiable reason, the tax authority has the right to determine the amount of tax payable.

Article 11 of the Measures for the Administration of Individual Income Tax on Income from Equity Transfer (for Trial Implementation) stipulates that if the declared income from equity transfer is obviously low and there is no justifiable reason, the competent tax authority may approve the income from equity transfer. At the same time, Article 13 also lists four situations in which equity income is obviously low, but can be regarded as justified.

In the second half of 2021, local tax bureaus successively issued Notices on Matters Relating to the Transfer of Equity by Individuals, informing natural persons that the transfer of equity must first file tax returns and obtain tax payment certificates before going to the Market Supervision Administration for shareholder changes.

In the early days, some local tax authorities recognized the method of one-dollar transfer, and the transferee of equity could make zero declaration directly in the tax system. Some tax authorities believed that there was a qualitative difference between one-dollar transfer and zero-dollar transfer, because the former was a paid transaction and the latter was a free gift. However, today's tax authorities for tax collection and management is becoming more and more strict, a dollar transfer of equity will not reduce the cost of equity transfer, but will increase the risk of being concerned by the tax authorities, and then the use of approved collection and other methods, resulting in enterprises to pay huge taxes and fines.

Thus, the free transfer of equity by shareholders does not mean that the transferee is not required to pay taxes, but rather that the income from the transfer of equity should be determined in accordance with the amount of the company's net assets or other methods in accordance with the relevant laws and regulations.

Basic case:Defendant Erjingding Company was established on March 8, 2005. The plaintiff's General Construction Institute and Defendant One Boyuan Yazhu are two shareholders of Jingding Company, holding 20% and 80% of the shares respectively. On February 14, 2007, Boyuan Yazhu and the General Construction Institute signed the Equity Transfer Agreement, agreeing that Boyuan Yazhu is willing to transfer its 31% equity of Jingding Company to the General Construction Institute at a price of 1 yuan, and agreeing that Boyuan Yazhu should issue a legal and effective resolution of the shareholders' meeting on this matter.

On the same day, General Construction Institute signed a Memorandum with Boyuan Yazhu, stipulating that 2. Boyuan Yazhu should transfer 31% equity to Party A without paying any consideration. The Equity Transfer Agreement is priced at 1 yuan, which is based on the change of industrial and commercial registration information. The 1 yuan is only symbolic and does not represent the actual monetary value... 7. Party B promises to stay in the holding company, the company has no external debt and contingent debt. If there is a debt, Party B shall clearly and truthfully inform Party A in writing, and only after the pending plan is discussed can the equity transfer procedures be handled.

On the same day, Boyuan Yazhu issued a "letter of commitment", stating: the Company in the holding of Jingding Company, Jingding Company no external debt and contingent debt. If so, our company is responsible for paying off.

On March 16 of the same year, Boyuan Yazhu issued a letter stating that the above-mentioned "Equity Transfer Agreement" and "Memorandum" were signed under pressure from the General Construction Institute. Without asset evaluation, only 1 yuan was used as the consideration to obtain equity, which was detrimental to Boyuan Yazhu's legitimate rights and interests. The equity transfer agreement obviously violated the law and was obviously unfair, and the company could not perform the "Equity Transfer Agreement."

On March 19 of the same year, the General Construction Institute issued a reply letter to Boyuan Yazhu on "Emergency Report on Share Transfer of Shenzhen Jingding Construction Engineering Co., Ltd.", believing that the contents of the letter sent by Boyuan Yazhu were inconsistent with the facts and the requirements were unreasonable. The share transfer procedures should be started before March 21, 2007, and Boyuan Yazhu would be deemed to have breached the contract if it was overdue.

After that, the General Construction Institute delivered relevant notices urging the performance of the equity transfer agreement to Boyuan Yazhu through notarization in 2010, 2012, the end of 2013, the end of 2015 and the end of 2017, but both defendants failed to perform.

Therefore, the General Construction Court sued the court to order Boyuan Yazhu to the company registration authority to change the registration of its 31% stake in Jingding Company to the General Construction Court, and Jingding Company recorded the above-mentioned shares in the company's register of shareholders and went through the registration procedures.

The Court of First Instance (Futian District People's Court of Shenzhen City, Guangdong Province) held that:The "Equity Transfer Agreement" signed by the General Construction Institute and Boyuan Yazhu is the true intention of both parties. It does not violate the mandatory provisions of laws and administrative regulations and is confirmed in accordance with the law. Regarding whether the Equity Transfer Agreement is a gift contract. A gift contract is a contract in which the donor gives his property to the donee free of charge, and the donee expresses his acceptance of the gift.In the "Equity Transfer Agreement" signed by the General Construction Institute and Boyuan Yazhu, the equity transfer price agreed by both parties is 1 yuan, not free of charge, and looking at the contents of the "Equity Transfer Agreement", "Memorandum" and "Letter of Commitment", Boyuan Yazhu did not show the meaning of "gift", nor did the General Construction Institute "accept the gift. Therefore, the Equity Transfer Agreement in this case is not a gift contract.Boyuan Yazhu's claim of non-performance of the equity transfer agreement in question on the grounds of exercising the right of arbitrary revocation cannot be established. However, because the second defendant filed a statute of limitations defense in this case, the request of the General Construction Court was rejected in accordance with the law.

The Court of Second Instance (Shenzhen Intermediate People's Court of Guangdong Province) held that:Both parties agreed in the Equity Transfer Agreement that Boyuan Yazhu would transfer its 31% equity of Jingding Company to the General Construction Institute, and the transfer price was 1 yuan; it was agreed in the Memorandum that Boyuan Yazhu would transfer its 31% equity of Jingding Company to the General Construction Institute, and the General Construction Institute did not need to pay any consideration,The price of the Equity Transfer Agreement is $1, which is specific based on the change of business registration information, and the $1 is only symbolic and does not represent the actual monetary value.The Letter of Commitment issued by Boyuan Yazhu states that Jingding has no external debt or contingent debt, and if there is any debt, Boyuan Yazhu is responsible for paying it off. As can be seen from the contents of the Equity Transfer Agreement, the Memorandum and the Undertaking,The transfer of the equity interest by the General Building Institute is not conditional on the assumption of shareholder obligations or other liabilities under the equity interest.Therefore, the above-mentioned Equity Transfer Agreement is in the nature of a gift contract and should be established on the condition that the equity is actually delivered.

Shortly after the signing of the contract, Boyuan Yazhu issued an "emergency report" to the General Construction Institute, indicating that it would not perform the agreement.Since then, both parties have not gone to the industrial and commercial administration department for the registration of equity change, and the equity has not been transferred, so the above-mentioned Equity Transfer Agreement has not been established.The General Construction Institute requested Boyuan Yazhu to transfer 31% of Jingding Company's equity to the General Construction Institute in accordance with the above-mentioned equity transfer agreement. There is no factual and legal basis. The reason cannot be established and should be rejected. The judgment of the first instance rejects the claim of the General Construction Court, which is correct and should be upheld.

Basic case:Defendant Yitiankai Real Estate was established on April 16, 2010. At the time of establishment, it was a one-person limited liability company. The shareholder was Defendant Ertiankai Investment with a registered capital of 50 million yuan. In 2011, Defendant 2 and Plaintiff Tao Jun signed an Equity Transfer Agreement, agreeing that Tiankai Investment will transfer 10% of its shares in Tiankai Real Estate Company to the Plaintiff, with the transfer amount of 0 yuan. The delivery date of the equity transfer is the date on which both parties complete the equity transfer procedures and the change registration procedures of related companies. On the same day, the second defendant signed a supplementary agreement with the plaintiff, stating that due to the financing needs of the two defendants, the plaintiff cannot cooperate with the plaintiff to complete the equity change registration procedures. Since the signing and effective date of the aforementioned Equity Transfer Agreement, the plaintiff holds 10% equity of Tiankai Real Estate and becomes a shareholder of the company, enjoying corresponding shareholders' rights and obligations. In view of the fact that Tiankai Real Estate cannot cooperate with the plaintiff to complete the equity change registration procedures, tiankai Investment promised that during the period of holding the plaintiff's equity, it shall not cause damage to the 10% equity held on behalf of the plaintiff. When the conditions for handling the equity registration procedures are met, the second defendant shall immediately cooperate with the relevant procedures, and the second defendant shall seal the agreement.

On December 13, 2013, Defendant 2 sent a letter to the plaintiff to cancel the donation of 10% equity of Tiankai Real Estate Company.

The Court of First Instance (the People's Court of Cangnan County, Zhejiang Province) held that:The second defendant argued that the Equity Transfer Agreement was actually a gift contract. However, judging from the name and text of the agreement, the words "equity transfer" were used, and there was no word "gift". On the surface, the contract should be a contract for equity transfer, and there was no expression of gift. Although the transfer of the equity transfer is "zero yuan", the equity is different from the general movable or immovable property rights,The transfer of equity does not imply an inevitable increase in the assets of the transferee, on the contrary, there may be future risks in the operation of the business related to the equity, and the transferee is therefore liable, which is also the consideration of the transferee's transfer of equity.Therefore, both on the surface and in substance, the second defendant's claim that the contract is a gift contract is not convincing, and the second defendant's letter on the cancellation of the gift does not have the legal effect of canceling the contract. Therefore, the court ruled that Defendant One should transfer its 10% equity of Defendant One to the Plaintiff for industrial and commercial change registration, and the Plaintiff and Defendant Two should cooperate.

Basic case:On June 23, 2011, the defendant Kong Qingrui and the defendant Jiang Hui signed an Equity Transfer Agreement, which stated: "Party A (transferor) Kong Qingrui, Party B (transferee) Jiang Hui, and Party A and Party B have reached the following agreement on equity transfer in accordance with the provisions of the Company Law and in the principles of equality, voluntariness and reasonableness: 1. With the consent of shareholders, party A shall transfer its 250000 yuan equity interest in the third party Jinhui Company to Party B in accordance with the law. 2. The transfer price is free of charge. 3, Party A in accordance with the law to transfer the equity to Party B, its rights and obligations in the company shall be borne by Party B, Party B abide by and implement the articles of association. 4. This Agreement shall come into force after being signed by both parties and registered by the administrative department for industry and commerce. On the same day, the defendant Kong Qingrui and the defendant Kong signed an "Equity Transfer Agreement". Party A (transferor) Kong Qingrui and Party B (transferee) Kong signed an "Equity Transfer Agreement". Except for Article 1 "With the consent of shareholders, Party A shall transfer its 120000 yuan equity held in the company to Party B according to law", the rest of the terms in the agreement are consistent with the contents of the agreement signed by Jiang Hui. On June 27, 2011, Jinhui Company held a shareholders' meeting and formed a resolution to agree to the above matters, but the relevant materials of the meeting were not filed in Zhifu Branch of Yantai Administration for Industry and Commerce.

On October 11, 2012, the plaintiff Kong Zhiren sued the court on the grounds that on June 23, 2011, without his knowledge, the defendant Kong Qingrui transferred 250000 yuan equity and 120000 yuan equity of 570000 yuan equity in Jinhui Company to the defendants Jiang Hui and Kong Mou at the same time, depriving the plaintiff of the right of first refusal, demanding confirmation that the equity transfer agreement between the defendant Kong Qingrui and the defendants Jiang Hui and Kong Mou is invalid. During the trial of the case, the plaintiff Kong Zhiren changed the litigation request during the second trial on December 12, 2012, requesting confirmation that the plaintiff transferred the defendant Kong Qingrui to the defendants Jiang Hui and Kong on June 23, 2011 for free. The equity exercised the preemptive right.

The Court of First Instance (People's Court of Muping District, Yantai City, Shandong Province) held that:The focus of the dispute in this case is whether the equity transfer between the defendant Kong Qingrui and the defendants Jiang Hui and Kong is legal, and whether the plaintiff can revoke the equity transfer agreement between the three defendants. First of all, the subject of the equity transfer contract is that although the equity belongs to the category of private rights, it must be the equity that can be transferred according to law due to its complexity. The equity prohibited or restricted from being transferred by Chinese laws include promoter shares and employee shares. In this case, the defendant Kong Qingrui contributed 570000 yuan when the third party Jinhui Company was registered and established, and the equity he held was the ordinary equity of the limited liability company legally held by him, A shareholder as a third party has the right to transfer the shares he owns in accordance with the law. Secondly, according to Article 72 of the Company Law and the Articles of Association of Jinhui, shareholders may transfer all or part of their capital contributions to each other. When a shareholder transfers a capital contribution to a person other than a shareholder, it must be approved by a majority of all shareholders; a shareholder who does not agree to the transfer shall purchase the capital contribution of the transfer, and if he does not purchase the capital contribution of the transfer, he shall be deemed to have agreed to the transfer. In this case,Before signing the equity transfer agreement between the three defendants, the procedural elements stipulated by law were not completed. Although the equity transfer agreement was established, it did not meet the prerequisites for legal transfer, so the equity transfer was illegal and did not take effect. Although the defendants Jiang Hui and Kong Mou think that the equity transfer contract involved in the case is a free gift contract, due to the particularity of the subject matter of the gift (with identity rights, property rights and management rights at the same time), it must be restricted by the Company Law and the articles of association of the third party, and the two documents do not make different provisions on whether the transfer is paid or not, therefore, the Court does not support the defense of the second defendant that the free equity transfer contract in this case does not have the right of first refusal and other procedural conditions.

In summary, the court ruled to revoke the equity transfer agreement signed by the defendant Kong Qingrui, the defendant Jiang Hui, and the defendant Kong on June 23, 2011; the third party Jinhui Company should go to its registration authority, Zhifu Branch of Yantai Administration for Industry and Commerce. Change registration procedures.