Definition of terms
Before we provide you with the cases related to selling your company and its tax implications, we will first introduce some useful terms related to selling your company.
A profit made from the sale of a capital asset (investment or real estate). The gain is not realized until the asset is sold. A capital gain may be short-term (one year or less) or long-term and must be claimed on income taxes.
Example 1 (long-term): Mr. X buys a house in Shanghai at RMB300,000. As time passes, the real estate market of Shanghai surges. He decides to sell it in 2020 at RMB1,500,000. His capital gain is RMB1,200,000.
Example 2 (short-term): Mrs. Y buys a car in January 2019 at RMB60,000. She decides to sell it for RMB80,000 in August because she does not need it anymore. Her capital gain is RMB20,000.
Capital Gain Tax (CGT): A tax on the gain you make (not on the amount of money you receive) from the sale of a capital asset.
- Long-term capital gains tax depends on your tax bracket. The rate is 0 percent, 15 percent, or 20 percent.
- Short-term capital gains are taxed as ordinary income.
The CGT is calculated using the formula: Selling Price – Capital cost x 10 percent (company shareholder) or 20 percent (individual shareholder).
A sum of money paid regularly by a company to its shareholders out of its profits (or reserves). It is important to distribute the dividends to the foreign parent company or shareholders before selling your company in China. Sending dividends requires an annual audit by an external accounting firm.
A company that does not conduct any operations, ventures, or other active tasks for itself. Instead, it exists to own assets. The holding exists mostly to create a link between different companies (which is a group in the end). Further, the physical owners of the company own the holding itself.
A limited company that owns shares in another limited company.
A person (that is not an institutional investor or part of an employee shareholders’ agreement) owning shares in a limited company.