Meaning
Statutory obligations require the purchaser of equity to deduct and remit taxes from the payment made to the seller. Transferee withholding liability ensures that the Chinese government receives the tax due on the transaction at the source. This duty falls on the party paying the consideration regardless of their location.
Financial Duty
The buyer must calculate the tax based on the gain realized by the seller. Under transferee withholding liability, the required amount is typically ten percent of the profit from the Chinese portion of the deal. The funds must be remitted to the tax bureau within seven days of the payment.
Payment Deduction
Failure to fulfill this obligation results in administrative penalties for the purchaser. Even if the seller is responsible for the underlying tax, transferee withholding liability makes the buyer the primary collector. If the buyer fails to withhold, they may be forced to pay the tax themselves along with late payment interest.
Compliance Burden
Documents proving the payment and the calculation of the tax must be kept in the corporate records. Meeting the transferee withholding liability is a requirement for the Chinese target company to update its registration with the local authorities. This linkage ensures that the tax is settled before the change of ownership is finalized in the domestic registry.
