PRC Tax Authorities: a closer look at low share transaction prices

On December 14, 2010, the State Administration of Taxation ("SAT") promulgated an Announcement on Issues Concerning the Verification of Taxation Basis of Individual Income Tax Payable on Equity Transfer Income ("Announcement"). The Announcement came into effect on January 14, 2010.

The Announcement only applies to sales of equity interest by individuals and seeks to combat situations in which companies are sold very cheaply on paper. Experience has shown that Chinese entrepreneurs are very strong in negotiating prices (i.e. selling foreigners the Chinese dream) and it is very rare for a company's equity to be sold at a price below its net asset value unless there is some other transaction taking place outside of the share documentation (i.e. offshore payment, consulting fees etc.) which makes up for the shortfall.