Recently, after the promulgation and implementation of the new "", enterprises can use capital reserves to make up for losses, and in combination with the original regulations, enterprises can now use paid-in capital and capital reserves to make up for losses. There has always been a controversy about how such enterprises should reduce their capital to make up for their losses, and we are trying to find an answer.
Recently, I have also seen a number of lawyers and tax accountants analyze this issue from a legal and accounting perspective, and the conclusions are also different. However, my general feeling is that some of the conclusions that come to the final analysis of the problem are always scratching the itch and do not get to the heart of the problem. Therefore, when I have been thinking about this issue recently, I am actually thinking about another issue, that is, the methodology of our research on complex fiscal and taxation issues. It is the same in any discipline, if you can't constantly develop, improve and upgrade your own research tools and methods, always make a comparative analysis like that, and then subjectively draw conclusions based on your own analysis, and seem to persuade others to accept your own conclusions, this kind of crude research method often can't solve any problems.
For example, on the issue of whether an enterprise should pay enterprise income tax if it uses paid-in capital and capital reserve to make up for losses, you only analyze the historical evolution at the level of the Company Law, the legal and financial definition of capital reserve, and if you only stay at this level, there is no way to reach any conclusion. Because the treatment of capital reduction and loss compensation at the level of the Company Law and the treatment of capital reduction and loss compensation at the accounting level are based on their respective purposes, people are not here to solve the problems at the level of tax law. Therefore, it is impossible to solve, whether to pay tax for capital reduction and deficit payment from the level of the Company Law and the accounting level alone. This is a mistake at the methodological level of the research question, and as in the natural sciences, if the research method is wrong, it is naturally impossible to reach a conclusion.
Therefore, in this article, we try to show you another methodological problem in the study of this kind of fiscal and tax issues. We believe that in the study of complex fiscal and taxation issues, we should learn to use the research methods of natural science, that is, for any complex fiscal and taxation problems, we can adopt the following research methods:
1. Dimensionality reduction thinking: This is a common research method for complex problems in mathematical research, and we also need this kind of thinking in the study of fiscal and taxation issues, to reduce the dimensionality of complex problems, and focus on simple problems that we are familiar with and have mature rules for focused research;
2. Model construction thinking: For some tax problems, we can study by building a simple model. Because in the model study, by transforming the operating rules behind the tax documents into parameter definitions and operation rules, the research of the problem has a very strong rigor and logical consistency, and there will not be the kind of people who write a lot of things in a hurry, and then come to their own conclusions, and others don't know what you write and jump directly to what your conclusions are. In this way, there is no way for people to test and question. Through the thinking of model construction, the research of fiscal and taxation issues is mathematized, from the research assumptions, parameter definitions, rule definitions to the final conclusion, we can have a clear basis for discussion, where the controversy is, where the right and wrong are, there will be a clear discussion track, everyone can know what I should question and what is wrong, if you can't find the error, then you should accept the conclusion he reached. This is the scientific method of research.
In the following, we will try to use this research method to study the income tax problem of enterprises using paid-in capital (including capital reserves) to cover losses.
Step 1:
Dimensionality reduction thinking: Although we are talking about the use of paid-in capital (including capital reserve) to make up for the loss of the enterprise, which can be to make up for the loss within 5 years of the tax law, or it may be to make up for the loss of the tax law 5 years ago, but the core problem is the following steps:
The first step should be to adjust the paid-in capital and capital reserve to undistributed profits as a positive number, and then offset the undistributed profits of this positive number with the undistributed profits of the previous negative number, so as to have the effect of covering the losses. Therefore, through the analysis of this step, we can carry out dimensionality reduction treatment, that is, the problem of positive and negative offsetting of undistributed profits, and the problem of making up for losses is a problem that has been clarified in the rules, and how to make up for it within 5 years and how to make up for it 5 years ago has been clearly stipulated in the tax law. So, let's get rid of this factor first. After the dimensionality reduction, we study the income tax issue of enterprises making up for losses by reducing capital, and the core should focus on:
However, it is further clarified that after the shareholders have invested their funds in the corporate company, the corporate company has changed the paid-in capital and capital reserve to the account of undistributed profits, focusing on the income tax treatment of such actions.
With the core of this research question in mind, we began to build a simple model to analyze. However, in view of the problem of economic double taxation of natural person shareholders (and the current treatment of some capital reserve increases of natural person shareholders are still flawed), in order to focus more on the problem, we construct a research model of corporate shareholders and legal person companies to analyze this problem:
Step 2:
We need to define the parameters of the model accurately. It is important to note that there is a difference between the Company Law and the financial definition of capital reserves, undistributed profits and our tax laws. In our tax law, there are actually only two concepts:
Money invested by shareholders
Either in paid-up capital or in capital reserve-capital premium.
The money earned by the company
The money earned by the company is exempt from tax according to the tax law, and the tax is taxed, and finally it forms undistributed profits under the tax law, and this part of the undistributed profits is calculated as after-tax dividends when distributed to shareholders. Therefore, the after-tax undistributed profits under the tax law cover the undistributed profits, surplus reserves and other capital reserves in the capital reserve at the company law and financial levels. The surplus reserve itself comes from the undistributed profits after tax, and at the same time, for the company, such as the funds received by donations, financial subsidies enter the capital reserve - other capital reserves, which are taxable income in tax and are taxed according to the regulations.
Therefore, after clarifying the definition of the parameters, we carried out a second dimensionality reduction, so after further dimensionality reduction, we focused on the study:
What kind of income tax problems arise when a corporate shareholder adjusts the paid-in capital and capital reserve-capital premium originally invested in the company to undistributed profits? After focusing on this issue, we need to translate the current laws and regulations related to enterprise income tax into model operation rules:
1. The money invested by the corporate shareholders in the company, whether it is into the paid-in capital or the capital reserve, is calculated as the tax basis of the corporate shareholders' investment in the company;
2. The profits earned by the company must be formed after paying 25% enterprise income tax at the company level to form accounting undistributed profits;
3. The company's undistributed profits distribute dividends to corporate shareholders, and corporate shareholders are exempt from tax, and at the same time, the tax basis of corporate shareholders' investment in the company is not reduced;
4. In the liquidation process of the company, the part equivalent to the undistributed profit obtained by the corporate shareholders shall be calculated as tax-free dividend income (). Similarly, in the process of capital reduction (partial liquidation) of the company, the part of the assets obtained by the corporate shareholders that are equivalent to the undistributed profits of the invested enterprise calculated in proportion to the reduction of paid-in capital shall also be recognized as tax-free dividend income ();
5. If an enterprise converts its capital reserve - capital premium into paid-in capital, the corporate shareholder does not recognize the dividend income, nor does it increase the tax basis of long-term equity investment ();
6. If an enterprise uses undistributed profits to increase its paid-in capital (including capital reserve - capital premium), the corporate shareholders shall recognize it as tax-exempt dividend income, and at the same time increase the tax basis of their equity investment in the company.
It should be noted that the model operation rules summarized above according to the regulations of the mainland are very important, which is the basis for us to build the model later and use it for specific problem analysis to draw what kind of conclusions we can draw.
Therefore, after clarifying the above model operation rules, we analyze by constructing a model case, assuming that company A invests 10 million to establish company B, of which 2 million enters the paid-in capital and 8 million enters the capital reserve-capital premium:
What kind of income tax problem will I have if I move the capital reserve-capital premium of 8 million to the undistributed profits?
We see that if we only look at the owner's equity, then the capital reserve-capital premium of 8 million is transferred to the undistributed profits, and the owner's equity has not changed in any way. Therefore, I see that some people's articles have written a lot of analyses of company law, and the final conclusion is that "the form of capital reduction to make up for losses", this kind of conclusion is untenable, and your so-called suitability or inappropriateness is just a kind of self-subjective view of consolation, rather than a conclusion based on rigorous methodological analysis. Because, you have not studied it in detail at all, and there are substantial differences in the tax attributes of mainland enterprise income tax between the two different subjects of "paid-in capital", "capital reserve-capital premium" and "undistributed profits".
We can take a look at it, if company A invests 10 million to company B, the tax basis of A's long-term equity investment in B is 10 million, and if it is liquidated directly, B has no liquidation income, and A's investment cost recovery does not have any investment income or loss, which is very clear.
Let's further evolve the model, company A invests 10 million in company B, B makes 4 million money, and after paying 1 million corporate income tax, the undistributed profit is 3 million:
At this time, we know that the total assets of Company B are 13 million, and the net assets (owner's equity) are also 13 million. At the same time, the tax basis of Company A's long-term equity investment in Company B is still 10 million. At this time, if Company B is liquidated, the assets allocated to Company A are 13 million, according to the current model operation rules ():
3,000,000 is dividend income, and Company A is exempt from tax;
The remaining 10 million belongs to the income from equity transfer, minus the cost of long-term equity investment in Company B of 10 million, and the liquidation income of Company A is 0.
Therefore, the basic conclusion is very clear, that is, for the corporate shareholders, when I invest my money in the following company, the company distributes only two parts of the funds to me in the liquidation process: one part is the money I originally invested, and the other part is the money that the company earns that has been paid tax, and this part of the money is tax-free. Therefore, under normal circumstances, in the liquidation process of the company, the liquidation income confirmed by the shareholders of the legal person must be zero. This is the result of the current set of rules for corporate income tax in mainland China. Of course, this conclusion may drift because we have restrictions on loss recovery and tax-free dividend income (for example, the tax-free holding of dividends of listed companies must be held for more than 12 months), which is a drift caused by special rules and can be ignored.
Now, let's demonstrate, here, I'll move the capital reserve-capital premium of 800 to the undistributed profits:
It should be noted that the premise of our study model is that the corporate shareholders only transfer the paid-in capital and capital reserve-capital premium to the undistributed profit model after the company is established.
Let's take a look, we transfer the capital reserve - capital premium of 800 to undistributed profits, and the undistributed profits from 300 to 1100. At this time, the total assets and net assets of Company B are still 1300. Moreover, the investment cost of Company A to Company B is still 1000.
At this time, does Company B have income tax problems? You can't conclude that there aren't any income tax issues just from the fact that there hasn't been a change in the net worth of Company B. Because, based on the current corporate income tax rules in mainland China:
1. Capital reserve - capital premium belongs to shareholders' investment, according to the rules of the text, this part is not calculated as tax-free dividend income when converted, and the tax basis of long-term equity investment is not increased. In the liquidation process, this part is not counted as tax-free dividend income for exclusion.
2. However, the tax attributes of the undistributed profit account are completely different, and the conversion link should be recognized as tax-free dividend income, and the tax basis of the long-term equity investment of the company by the corporate shareholders should be increased. In the liquidation process, this part is calculated as the exclusion of tax-free dividends.
Therefore, the tax attributes of "capital reserve-capital premium" and "undistributed profits" in the corporate income tax law of mainland China are completely different, and we need to examine the impact of this difference on the conclusion of the model.
Going back to the model, we see that if Company A does not change the capital reserve-capital premium, the result is that Company B earns 400 in profits, pays 100 in corporate income tax, and forms 300 in undistributed profits. After the liquidation, the liquidation income confirmed by the shareholders of legal person A is 0, which is in line with the rules of our tax law, that is, the profits are only paid enterprise income tax at the level of company B, and there will be no repeated payment of enterprise income tax at the level of corporate company, and there is no additional loss.
At this time, if we make a profit of 4 million yuan in company B and pay 100 yuan of enterprise income tax to form an undistributed profit of 300 yuan, we only transfer the capital reserve-capital premium to the undistributed profit, and the undistributed profit is 11 million yuan;
At this time, we immediately start the operation of the model, and according to the operation rules we defined above, we will see what kind of result the model will get after running:
We need to know that the tax attribute of undistributed profits in liquidation is to be recognized as tax-exempt dividend income, and the liquidation conclusion is:
1. Of the 13 million liquidated assets of Company A, 11 million should be recognized as tax-exempt dividend income;
2. The remaining 2 million assets of Company A deduct his original investment cost of 10 million yuan, and the loss of 8 million yuan of equity transfer should be recognized.
Here you can find the problem at a glance, because although I only transferred the capital reserve-capital premium to the undistributed profits, but because in the model calculation, the tax attributes of "capital reserve-capital premium" and "undistributed profits" are different, and the model calculation results in the liquidation of company A's investment loss of 800, which is wrong. Because it stands to reason that I just put the capital reserve-capital premium in a different account, and the net assets have not changed, then there should be no liquidation gains or losses in the liquidation. However, the results obtained by the actual model operation are not what you want, and there is an unexpected situation, that is, there is an investment loss in the liquidation at the level of corporate shareholders, which leads to the problem of underpaying taxes. Then we assume that the defined rule is incorrect.
At this point, we immediately start the operation of the model, according to the operation rules we defined above, and see what kind of result the operation finally obtains:
Step 1: Company B's 800 income needs to pay corporate income tax at 25%, and finally pay 200 corporate income tax, the undistributed profit is 9 million (300 + 600), and the net assets become 11 million;
Step 2: In the liquidation of Company B, among the 11 million liquidation assets obtained by Company A, 9 million are tax-free dividends;
Step 3: For the remaining part, the income from liquidated assets obtained by Company A is 2 million, minus its investment cost of 10 million to Company B, and the investment transfer loss of 8 million is recognized.
At this time, you see that we have changed the operation rules of capital reserve-capital premium conversion into undistributed profits, and the result we get after running the model is that the income of 800 is recognized at the level of company B, but the loss of 800 is recognized at the level of company A after liquidation, so that in the end, after offsetting the shareholders and the company level, the 4 million profits earned by company A by setting up company B still only paid 100 corporate income tax at the level of company B, and there is no double taxation problem at the level of the whole company and shareholders. So, we define this algorithm, and the model comes to the conclusion that it is consistent with our rule of non-double taxation. Therefore, this algorithm is correct.
Of course, you can try to adjust the paid-in capital to undistributed profits, and also use the model and rules we built to analyze, and the conclusion is the same, that is, the enterprise adjusts the paid-in capital to the undistributed profits to make up for losses, and it is also necessary to recognize the pre-tax profits at the enterprise level and pay the enterprise income tax first, so that the results obtained by the model calculation are correct, otherwise there will be the problem of underpaying income tax.
Therefore, what we have shown above is a methodological problem of fiscal and tax problem analysis, which is based on dimensionality reduction thinking and model construction, so that our research on complex fiscal and tax issues can be gathered to the core point. Our research does not have preconceived views, but through the objective according to the rules of the mainland enterprise income tax, the construction of an analysis model, for the different views on this issue, based on the current rules to see whether the results of the model run in line with our overall non-double taxation of the basic principle, if it is in line with the support of this view, if not, then eliminate this view, such a research method can make the study of fiscal and tax issues more scientific and reasonable.
Similarly, we also want to remind everyone that in the research of national enterprise income tax laws, such as studying whether the mainland's capital reserve-capital premium is converted into undistributed profits and paying enterprise income tax, we cannot simply compare what the United States and France do about the conversion of capital reserve-capital premium into undistributed profits, so as to conclude what the mainland should do, this research method is wrong. For example, the federal income tax in United States is the same as that of the mainland, and it is also to avoid double taxation at the level of corporate income tax, but because United States does not have a registered capital publicity system similar to China, in the United States tax law rules, the differences in the operating rules behind these basic systems will lead to different conclusions at different operating rules. However, everyone's ultimate goal is the same, that is, the basic rules should be in various complex scenarios, the result of the operation of our model, in the corporate income tax system, income is only taxed once at the company level, and it cannot be levied twice or more times to cause double taxation, and there can be no non-taxation problem due to profit and loss offset at different levels.
Author: Zhao Guoqing, source: Zhonghui Tax Agent Office. The content of this article is for general information purposes only and is not intended as formal auditor, accounting, tax or other advice, and we cannot guarantee that such information will remain accurate in the future. No person should act on the basis of the information contained herein without having due regard to the relevant circumstances and obtaining appropriate professional advice. The articles reproduced in this issue are for academic exchange purposes only. The original copyright of the article or material belongs to the original author or original copyright owner, and we respect copyright protection. If you have any questions, please contact us, thank you!