Perspective | Key Points for Tax Exemption Recognition of Year-End Losses After Mid-Year Dividends for Enterprises
Published:
2025-12-19
The company distributed dividends mid-year but reported a loss at year-end. Can the dividends received by the corporate shareholders in the middle of the year be deemed invalid on the grounds that “there was no profit available for distribution at year-end due to the year-end loss”? Furthermore, can the annual loss incurred after the dividend distribution be retroactively used to negate the tax-exempt treatment? This article conducts an in-depth analysis of the above-mentioned disputes, drawing on the facts of the case and relevant legal provisions, and provides a legal basis for handling the case.
Introduction
The company distributed dividends mid-year but reported a loss at year-end. Can the dividends received by the corporate shareholder in the middle of the year be deemed invalid on the grounds that “there was no profit available for distribution at year-end due to the year-end loss”? Furthermore, can the annual loss incurred after the dividend distribution be retroactively used to negate the tax-exempt treatment? This article conducts an in-depth analysis of the above-mentioned disputes, drawing on the facts of the case and relevant legal provisions, and provides a legal basis for handling the case.
Basic Facts of the Case
From January to November 2021, Company A’s cumulative net profit, after offsetting losses from previous years and setting aside a statutory reserve fund at 10%, amounted to RMB 15.1 billion. In accordance with the Company Law and the company’s articles of association, on December 2, 2021, the Board of Directors of Company A reviewed and approved a dividend distribution of RMB 12.5 billion to its parent company (which is the sole shareholder of Company A), and submitted the proposal for approval by the parent company. On December 5, 2021, the Board of Directors of the parent company, based on Company A’s ability to distribute dividends—given that its distributable profits from January to November 2021 totaled RMB 15.1 billion—approved Company A’s dividend distribution of RMB 12.5 billion to the parent company. In December 2021, the parent company received the dividend payment of RMB 12.5 billion from Company A’s post-tax corporate income, and during the annual corporate income tax settlement, this amount was recognized as tax-exempt income pursuant to Article 26, Item (2) of the Corporate Income Tax Law.
After Company A distributed dividends totaling 12.5 billion yuan, it recognized an impairment loss of 14 billion yuan at the end of 2021. As a result, its December 2021 financial statements reflected a loss increase of 14 billion yuan. In its 2021 corporate income tax annual return and final settlement filing, the 14 billion yuan impairment loss was treated as a tax adjustment increase.
In 2023, the Tax Bureau of *District* in *City*, under the State Administration of Taxation, issued a “Notice on Tax Matters” to the parent company, based on Article 6 and Article 26 of the Corporate Income Tax Law, as well as Article 166 of the Company Law. General Corporate Financial Regulations Articles 50 and 51, as well as Article 12 and Article 13 of the “Measures for Handling Preferential Policies on Enterprise Income Tax” (State Administration of Taxation Announcement No. 23 of 2018), stipulate that if Company A incurs a year-end loss and has no profits available for distribution, its dividend distribution to its parent company would not comply with the relevant policy provisions. Therefore, the parent company is required to conduct a self-examination of its 2021 tax return regarding the RMB 12.5 billion preferential treatment it claimed—“exemption from enterprise income tax on equity investment income such as ordinary dividends and bonuses”—and make appropriate adjustments to its enterprise income tax liability. Taxable income Correct the 2021 tax return, pay the additional tax and late payment penalties.
Legal Analysis of This Case
First, China’s Company Law and its financial and accounting regulations do not contain any prohibitive provisions regarding mid-year dividends. Therefore, A Company’s mid-year dividend of 12.5 billion yuan does not violate the provisions of Article 166 of the Company Law.
Article 166 of the Company Law stipulates that after a company has allocated its post-tax profits—first by offsetting losses from previous years and then by setting aside the statutory reserve fund—the remaining post-tax profits may be distributed. Any profits distributed in violation of this prescribed order must be returned to the company. At the board meeting convened by Company A and its parent company to deliberate and approve shareholder dividends, Company A met the conditions for distributing dividends; it had already offset losses from previous years and set aside the statutory reserve fund, and its distribution sequence complied with the provisions of Article 166 of the Company Law.
Although Article 166 of the Company Law refers to “profits after tax for the current year,” this phrase cannot be interpreted solely as meaning that the period for distributing post-tax profits must be a calendar year. Article 163 of the Company Law stipulates that a company shall establish its own financial and accounting system in accordance with laws, administrative regulations, and the provisions of the fiscal authorities under the State Council. Article 7, Paragraph 2 of the Accounting Standards for Enterprises specifies that accounting periods are divided into annual periods and interim periods. An interim period refers to a reporting period shorter than a full accounting year. Thus, according to the Company Law and the relevant financial and accounting systems, companies are not restricted to using only calendar years as their accounting periods. There is no prohibition against distributing dividends based on interim accounting profits during the middle of the fiscal year. In line with the principle that "what is not prohibited by law is permitted," A Company’s dividend distribution at the mid-year point does not violate the Company Law or the applicable financial and accounting systems.
II. The “General Rules for Corporate Finance” constitute the regulatory framework for corporate financial management. Despite numerous amendments to the “Company Law,” no provisions have ever been introduced to impose penalties for violations of the provisions set forth in Articles 50 and 51 of the “General Rules for Corporate Finance.”
The “General Rules for Corporate Finance” constitute a regulatory framework for corporate financial management. At its core, these rules aim to standardize corporate financial practices and safeguard the legitimate rights and interests of the enterprise and its related parties. The mid-year dividend distribution by Company A this time was approved by the Board of Directors of Company A and subsequently endorsed by the Board of Directors of its parent company. Therefore, this mid-year dividend distribution by Company A does not infringe upon the legitimate rights and interests of either Company A or its parent company.
Article 50 of the General Rules on Corporate Finance stipulates the order for offsetting losses from previous years, setting aside statutory reserve funds, setting aside discretionary reserve funds, and distributing profits to investors. Article 51 provides that when there are no distributable profits in the current year, no profits may be distributed to investors. Paragraph (3) of Article 72 specifies that any profit distribution conducted in violation of the provisions of Articles 50 and 51 of the General Rules on Corporate Finance shall be subject to penalties as prescribed by the Company Law. The General Rules on Corporate Finance came into effect on January 1, 2007. However, although the Company Law has undergone several amendments, neither the Company Law (Revised in 2005), nor the Company Law (Amended in 2013), nor the currently valid Company Law (Amended in 2018) contains any provisions imposing penalties for violations of Articles 50 and 51 of the General Rules on Corporate Finance.
Therefore, even if Company A’s mid-year dividend distribution violates the financial management regulations stipulated in Articles 50 and 51 of the General Rules on Corporate Finance, according to the Company Law, it should not be subject to administrative penalties. Moreover, it is impossible to deny the fact that the parent company’s receipt of 12.5 billion yuan from Company A constitutes a dividend payment made by Company A to its shareholders.
III. The dividend of 12.5 billion yuan received by the parent company from Company A constitutes equity investment income such as dividends and bonuses among resident enterprises, which meets the tax-exemption conditions stipulated in the Corporate Income Tax Law.
The dividend income of 12.5 billion yuan received by the parent company qualifies as equity investment income, such as dividends and bonuses, as stipulated in Article 6, Paragraph (4) of the Corporate Income Tax Law, as well as equity investment income between qualified resident enterprises as specified in Article 26, Paragraph (2) of the Corporate Income Tax Law. If, in accordance with the requirements of the “Notice on Tax Matters,” the 12.5 billion yuan is not reported as tax-exempt income under the category of dividends, bonuses, and other equity investment income, the fundamental premise for adjusting the taxable income would be that this 12.5 billion yuan constitutes taxable income falling outside the scope of Article 6, Paragraph (4) of the Corporate Income Tax Law. Although Article 6 of the Corporate Income Tax Law lists “other income,” neither the implementing regulations of the Corporate Income Tax Law nor the detailed provisions in relevant normative documents provide for a scenario—where post-tax distributed dividends are separately taxed—that would fall within the definition of “other income” under Article 6 of the Corporate Income Tax Law. Therefore, the parent company’s income of 12.5 billion yuan should not be declared and taxed as taxable income under Article 6 of the Corporate Income Tax Law, excluding Paragraph (4).
From another perspective, the profits distributed by Company A have already been subject to corporate income tax. Therefore, requiring the parent company to pay additional taxes and late payment penalties on the interim dividend of 12.5 billion yuan it received would clearly constitute... Double taxation 。
4. Profit distribution is the business autonomy of the company and its shareholders, serving a legitimate commercial purpose and having no adverse impact on national tax revenues. Therefore, the parent company should enjoy tax-exempt treatment in accordance with the provisions governing tax-exempt income.
Article 76 of the Civil Code stipulates that a for-profit legal person is established with the purpose of generating profits and distributing them to shareholders and other investors. The primary objective of establishing a company is precisely to generate profits and distribute them to shareholders. A Company’s mid-year dividend distribution this time was necessitated by the need to delineate the business performance of shareholders before and after the subsequent equity transfer; it serves a legitimate commercial purpose and has not affected national tax revenues. Article 11 of the Regulations on Optimizing the Business Environment explicitly provides that market entities enjoy operational autonomy in accordance with the law. No organization or individual may interfere with any matters that, according to law, should be autonomously decided by market entities. Profit distribution is an exercise of the operational autonomy of both the company and its shareholders. A Company’s current profit distribution complies with the provisions of the Company Law as well as financial and accounting regulations. Moreover, the provision of asset impairment reserves following the dividend distribution also conforms to relevant financial and accounting standards. The fact that the company incurred losses after the dividend distribution does not negate the existence of prior business performance (post-tax profits).
The distribution of operating results by the company is based on accounting profits, and the tax law’s definition of tax-exempt dividends is also grounded in this same basis. The mid-year dividend paid by Company A to its parent company did not affect national tax revenues; therefore, in accordance with the law, the fact that these dividends are tax-exempt should not be denied, and Company A should enjoy the tax-exempt treatment as stipulated in the Corporate Income Tax Law regarding tax-exempt income.
Summary
The core conclusion of this case is that Company A’s mid-year dividend distribution in 2021 was lawful and compliant, and did not violate the relevant provisions of China’s Company Law as well as its financial and accounting regulations. The RMB 12.5 billion in dividends received by the parent company constitute tax-exempt dividend income between resident enterprises under the law. Therefore, the tax authority’s decision to require the parent company to pay additional taxes and late-payment penalties lacks both legal basis and factual support. The parent company is entitled to reject the tax authority’s improper adjustment demands and maintain the tax-exempt declaration for this dividend in its 2021 corporate income tax return.
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