Meaning
Cost adjustments reduce the taxable amount by accounting for the original investment made into the equity of a Chinese company. Deductible equity basis represents the historical cost of acquiring the assets that are being sold. This figure is subtracted from the sale price to determine the taxable gain.
Cost Determination
Taxpayers must provide proof of the original purchase price or capital contribution to establish the value. For the deductible equity basis to be accepted, the documents must include bank remittance slips and the original equity transfer agreement. These records are verified against the filings made with the local administration for market regulation.
Basis Adjustment
Capital increases or reductions during the holding period alter the final number. To calculate the current deductible equity basis, the tax bureau reviews all changes to the registered capital of the Chinese subsidiary. This ensures that only the actual net investment is used for the deduction.
Valuation Deduction
Exchange rate fluctuations are accounted for if the investment was made in a foreign currency. Because the deductible equity basis is calculated in yuan, the historical investment is converted using the rate at the time of the original transaction. This settled value is then used in the final tax computation.
