Since November 2022, tax authorities in multiple regions have begun to investigate the situation where "limited companies" have been converted into "partnerships" without liquidation, and have conducted interviews with the enterprises, shareholders, and partners involved. Tax cases involving "unliquidated tax payments in the form of enterprise conversion organizations" have erupted in multiple regions. This article will clarify the origin, handling methods, and focus of disputes of this type of case.

1、 To reduce tax burden, a limited company has been transformed into a partnership

Converting a limited company into a partnership usually occurs in limited companies that hold shares in listed companies. Due to the reduction of shares held by limited companies in listed companies, they will face a "two-level tax", namely, the corporate income tax on the transfer of shares, with a tax rate of 25%; The individual income tax rate for shareholders is 20%. If a partnership transfers shares, only one layer of personal income tax is required, and an excess progressive tax rate of 5% to 35% is applicable. Especially before January 1, 2022, i.e. before the implementation of the "Announcement on the Administration of the Collection of Individual Income Tax on Income from Equity Investment and Operation" (Announcement No. 41 of the State Administration of Taxation of the Ministry of Finance in 2021), partnerships were subject to verification and collection in accordance with the policies of the park, and the overall tax burden rate of individual income tax was at a low tax rate. Therefore, some limited companies that hold shares in listed companies usually change their organizational form from limited companies to partnerships before reducing their shares, in order to achieve the goal of reducing tax burden.

Not all regions support the transformation of limited companies into partnerships. Upon enquiry from the official website of multiple provincial market supervision and administration bureaus, many have received a response that "conversion is not allowed". Although the Xinjiang Uyghur Autonomous Region issued the New Industrial and Commercial Enterprise Registration [2010] No. 172 document in 2010, allowing limited companies to change into partnerships, it is understood that Xinjiang has refused to handle the change from equity investment and entrepreneurship type limited companies to limited partnerships since 2017. Judging from the current concentrated outbreak of cases, enterprises are mostly concentrated in the Zhongguancun National Independent Innovation Demonstration Zone in Beijing to complete the transformation. The reason is that there are clear legal documents in the Zhongguancun National Independent Innovation Demonstration Zone to support the conversion of limited companies into partnerships.

According to the reply from the Beijing Municipal Bureau of Market Supervision and Administration, the Zhongguancun National Independent Innovation Demonstration Zone is based on the Opinions of the State Administration for Industry and Commerce on Supporting the Construction of the Zhongguancun Science and Technology Park as a National Independent Innovation Demonstration Zone (Gong Shang Ban Zi [2009] No. 200) The "Trial Measures for the Registration of Enterprise Organizational Form Conversion in the Zhongguancun National Independent Innovation Demonstration Zone" (Jing Gong Shang Fa [2010] No. 131) allows enterprises registered in the park to convert limited companies into partnerships.

According to Article 2 of the "Trial Measures for the Registration of Enterprise Organizational Form Conversion in the Zhongguancun National Independent Innovation Demonstration Zone", these Measures shall apply to the registration of corporate, non corporate, partnership, sole proprietorship enterprises registered in the demonstration zone, as well as the transfer of branches of the above-mentioned enterprises to other organizational forms for registration. Article 4 stipulates that the conversion of corporate enterprises as legal persons into other organizational forms as stipulated in Article 2 of these Measures includes the following conversion methods: (1) conversion of corporate enterprises as legal persons into partnership enterprises; （2） The conversion of a corporate enterprise into a sole proprietorship enterprise; （3） The corporate legal person is converted into a branch company.

According to the above legal documents, before 2022, most limited companies chose to relocate to the Zhongguancun National Independent Innovation Demonstration Zone in Beijing and then move out after completing the organizational transformation.

3、 Legal basis for tax authorities to require the original limited company to make a supplementary declaration

According to a number of cases undertaken by the author, most enterprises completed the transformation of their organizational forms in the Zhongguancun National Independent Innovation Demonstration Zone, and then moved their partnerships to parks in other provinces (parks that are allowed to be approved and expropriated by partnership partners before January 1, 2022). Currently, there have been no centralized cases of whether to apply the approved tax or audit tax after a partnership enterprise reduces its shareholding in a listed company (it is predicted that such cases will be highlighted in this year). Currently, due to the supervision of the State Administration of Taxation, the majority of cases focus on the tax treatment during the transformation of the organizational form of the enterprise, namely, whether the conversion of a limited company into a partnership should be subject to liquidation and tax payment.

Since November 2022, due to tax big data risk alerts and supervision by the State Administration of Taxation, multiple tax authorities have conducted inspections on the liquidation and tax payment of limited liability partnership enterprises before 2022. After an interview with the person involved, a "Notice of Ordering Correction within a Time Limit" and a "Notice of Tax Matters Concerning the Submission of Tax-related Information within a Time Limit" were also issued in accordance with the procedures, requiring enterprises or individuals to file tax returns and make up tax payments in accordance with the law. The legal basis for tax authorities to handle such cases is the Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Treatment of Enterprise Income Tax in Enterprise Restructuring Business (CS [2009] No. 59) and the Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Treatment of Enterprise Income Tax in Enterprise Liquidation Business (CS [2009] No. 60).

Article 4, paragraph 1, of the Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Treatment of Enterprise Income Tax in Enterprise Restructuring Business (CS [2009] No. 59) stipulates that if an enterprise is converted from a legal person to an unincorporated organization such as a sole proprietorship enterprise or partnership enterprise, or if its registration place is transferred outside the People's Republic of China (including Hong Kong, Macao, and Taiwan regions), it shall be deemed that the enterprise is liquidated and distributed, and shareholders shall reinvest to establish a new enterprise. The tax basis for all assets of an enterprise and shareholder investments should be determined on the basis of fair value.

Article 5 of the Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Treatment of Enterprise Income Tax in Enterprise Liquidation Business (CS [2009] No. 60) stipulates that the amount of remaining assets distributed by shareholders of the liquidated enterprise, which is equivalent to the accumulated undistributed profits and accumulated surplus reserves of the liquidated enterprise calculated based on the proportion of shares held by the shareholder, shall be recognized as dividend income; The balance of remaining assets after deducting dividend income, which exceeds or is lower than the shareholder's investment cost, shall be recognized as the shareholder's investment transfer income or loss. The tax basis for the assets distributed by the shareholders of the liquidated enterprise from the liquidated enterprise shall be determined based on the realizable value or actual transaction price.

In addition, Article 14 of the "Trial Measures for the Registration of Enterprise Organizational Form Conversion in the Zhongguancun National Independent Innovation Demonstration Zone" also stipulates that if a corporate enterprise, partnership enterprise, or sole proprietorship enterprise converts its organizational form, it shall settle all taxes of the original enterprise, perform liquidation procedures, and announce the transformation of enterprise organizational form.

According to the above regulations, the tax authorities require the original limited company to carry out liquidation and make up for the corporate income tax and personal income tax involved in the transformation of organizational form.

4、 The focus of disputes between tax collectors and taxpayers

As mentioned earlier, the tax authorities have required the enterprises and personnel involved in the case to file tax returns and make up for tax payments in accordance with the CS [2009] No. 59 and CS [2009] No. 69 documents, but they have encountered many difficulties in this round of tax inspections. The author summarizes the following tax disputes:

（1） The organizational form conversion complies with legal procedures, and the original registration authority did not require liquidation and tax payment

Most of the enterprises involved were relocated from other regions to parks such as the Zhongguancun National Independent Innovation Demonstration Zone that allowed conversion. After their migration is completed, they begin to process organizational form conversion. Due to not conducting business activities in the park, tax registration has not even been conducted. Therefore, in accordance with the requirements of the park's market supervision and management department, a simple method was applied to complete the organizational form conversion, and no liquidation report was submitted. Based on this, the enterprise believes that its organizational form transformation in accordance with the legal procedures required by the market supervision and management department of the park conforms to the legal procedures and should not be overturned.

（2） After the transformation of organizational form, the original legal entity has been destroyed and should no longer be recovered

From the current tax documents issued by local tax authorities, it can be seen that the tax authorities issue a document to the shareholders of the original limited company, requiring them to make up the individual income tax while also making up the tax on behalf of the original limited company. However, in fact, the legal entity of the original limited company has been destroyed, and the non declaration of corporate income tax caused by its non liquidation cannot be realized.
1. The original limited company no longer has the capacity to act due to the loss of its legal personality

"A limited company is a legal person, and according to Article 59 of the Civil Code of the People's Republic of China," the civil rights capacity and civil conduct capacity of a legal person shall arise from the establishment of the legal person and expire upon its termination. "Article 72, paragraph 3, states, "Upon the completion of liquidation and the completion of the cancellation of registration of a legal person, the legal person shall terminate; if it is not necessary to handle the registration of a legal person according to law, the legal person shall terminate upon the completion of liquidation." Article 30 of the Regulations of the People's Republic of China on the Administration of Registration of Market Entities stipulates, "Upon the cancellation of registration by the registration authority, the market entity shall terminate." According to the provisions of Article 30, after the liquidation process of an enterprise as a legal person is completed and the cancellation of registration is completed, the legal person's status.

After the transformation of the organizational form of an enterprise, the legal personality of its original limited company was completely eliminated, and its legal status as the subject of responsibility no longer existed. The outstanding reporting obligations could not be legally realized.

2. The shareholders of the original limited company are not eligible tax payers, and their taxation violates mandatory provisions of the law

Article 4 of the Law of the People's Republic of China on the Administration of Tax Collection stipulates that "entities and individuals that are obligated to pay taxes under laws and administrative regulations are taxpayers." Article 3 stipulates that, "The initiation and suspension of tax collection, as well as the reduction, exemption, refund, and compensation of tax shall be implemented in accordance with the provisions of the law. If the law authorizes the State Council to make provisions, the provisions of administrative regulations formulated by the State Council shall be implemented. No organ, unit, or individual may, in violation of the provisions of laws and administrative regulations, arbitrarily make decisions on the initiation and suspension of tax collection, as well as on the reduction, exemption, refund, and compensation of tax, and other decisions that contravene tax laws and administrative regulations."

Whether it is the subject of tax obligations and whether tax obligations occur are determined by laws and regulations. The law does not provide that "after the cancellation of an enterprise, shareholders, operators, and investors shall assume tax obligations and related administrative responsibilities." If the tax authorities require the original enterprise shareholders to pay corporate income tax on behalf of the original limited company, it is like changing the "subject of tax obligations" without authorization, which is not consistent with the statutory principles of tax collection, but also a serious violation of the mandatory provisions of the Tax Administration Law.

Counsel's advice

Follow the five steps for tax authorities to handle tax cases: prompt and remind, urge rectification, interview and warning, file a case for inspection, and publicly expose. Since the tax inspection was carried out in November 2022, the risk warning, rectification supervision, and appointment warning work of the tax office has come to an end. Currently, due to objections from enterprises and individuals, those who have not yet made tax returns in accordance with the methods required by the tax authorities will be transferred to the inspection authority for filing and inspection. If the enterprises or individuals involved continue to respond negatively, they may face adverse consequences.

Lawyer's reminder: After the case is transferred to the inspection authority, it is necessary to promptly prepare written legal opinions and evidentiary materials, and provide the legal reasons and evidence that have not been reported to the inspection authority according to law, in order to obtain the best handling method and prevent legal risks. If the case is still in the interview warning stage, it should also be actively and effectively responded to, and the tax risk warning should be eliminated as soon as possible.