Analysis of the Impact of Equity Transfer Tax on Corporate International Operations under the VIE Structure

How Does Equity Transfer Tax Affect Corporate International Operations under the VIE Structure?

In recent years, as Chinese companies have accelerated their internationalization, more and more firms have chosen to adopt the Variable Interest Entities VIE structure to raise capital and list overseas. This model not only circumvents domestic restrictions on foreign investment in certain industries but also offers greater flexibility for capital operations. However, during cross-border restructurings and equity adjustments, issues related to equity transfer tax have increasingly become a critical factor affecting the implementation of corporate international strategies.

The core of the VIE structure lies in achieving control over operating entities through contractual arrangements rather than direct equity ownership. In such structures, the offshore listed entity typically does not directly hold equity in the domestic operating company, but instead exercises control via a series of agreements-such as exclusive service agreements, equity pledge agreements, and voting rights agreements. Although this model has legal and regulatory ambiguities, it offers clear advantages in bypassing regulatory barriers and facilitating capital movements.

However, as global tax regulation becomes stricter-particularly under the OECD’s Base Erosion and Profit Shifting BEPS initiative-tax authorities worldwide are paying closer attention to how multinational corporations design structures to avoid taxation. Against this backdrop, equity transfer tax has become an unavoidable consideration in international business operations.

Basic Concepts and Scope of Equity Transfer Tax

Equity transfer tax generally refers to the tax burden arising from equity restructuring, asset transfers, or corporate reorganizations. Under various national tax laws, gains from equity transfers usually incur corporate income tax or capital gains tax. In cross-border transactions, where multiple tax jurisdictions are involved, the tax treatment becomes even more complex.

Take China as an example according to its Enterprise Income Tax Law and its implementing regulations, non-resident enterprises must pay 10% enterprise income tax on gains derived from transferring equity in Chinese enterprises. If the transaction spans multiple jurisdictions, considerations such as bilateral tax treaties and withholding tax rules also come into play.

Specific Characteristics of Equity Transfer Tax under the VIE Structure

Under the VIE framework, since the offshore entity does not directly own equity in the domestic operating company, equity transfers may occur at the WFOE Wholly Foreign-Owned Enterprise level during cross-border restructuring or equity transfers. While legally the offshore company may not directly own the domestic entity, in practice, foreign investors often exercise de facto control through WFOEs. Therefore, changes in WFOE equity can be viewed by tax authorities as substantive transfers of domestic assets.

For instance, in early 2025, a well-known internet company completed an offshore equity transfer under a VIE structure, which was later deemed by Chinese tax authorities as a substantial transfer of domestic assets, resulting in the payment of tens of millions of yuan in back taxes and penalties. This case illustrates the growing scrutiny from Chinese tax authorities on cross-border transactions involving VIE structures.

Impact of Equity Transfer Tax on Corporate International Operations

Firstly, the uncertainty surrounding equity transfer tax increases the cost and risk of cross-border restructuring. During processes such as offshore financing, mergers and acquisitions, or IPOs, companies often need to adjust their equity structures to meet regulatory requirements in different capital markets. Improper tax handling could lead to significant tax liabilities and delay transaction timelines due to compliance concerns.

Secondly, tightening tax oversight has prompted companies to place greater emphasis on tax planning. More firms are now conducting proactive tax compliance assessments when setting up VIE structures-such as choosing suitable jurisdictions for intermediate holding companies, leveraging tax treaties, and optimizing equity structures. For example, some companies establish holding companies in Singapore or the Cayman Islands to benefit from favorable tax regimes.

Thirdly, equity transfer tax also influences capital exit strategies. For foreign investors exiting a VIE investment, designing an optimal exit path that minimizes tax exposure is crucial. One approach is to sell shares in the offshore holding company rather than the domestic WFOE, potentially avoiding Chinese tax jurisdiction. However, this method may face challenges under anti-avoidance tax rules.

Strategic Recommendations for Enterprises

Faced with an increasingly complex tax regulatory environment, companies utilizing the VIE structure for international expansion should consider the following strategies

1. Conduct Proactive Tax Compliance Assessments Before engaging in cross-border restructuring or equity transfers, companies should evaluate potential tax implications thoroughly and seek professional tax advisory services if necessary.

2. Optimize Equity Structure Design By strategically placing intermediate holding companies in jurisdictions with favorable tax treaties or low tax rates, firms can reduce overall tax burdens.

3. Engage Proactively with Tax Authorities When undertaking cross-border transactions, companies should communicate openly with tax authorities and consider applying for Advance Pricing Arrangements APA or tax rulings to mitigate future disputes.

4. Monitor Changes in International Tax Rules The global tax landscape is evolving rapidly, especially with the implementation of the OECD-led global minimum tax initiative, which will further limit opportunities for tax avoidance through structural engineering.

Conclusion

While the VIE structure provides valuable flexibility for corporate internationalization, equity transfer tax cannot be overlooked. As tax regulation intensifies globally, businesses must integrate tax considerations into strategic planning to ensure international expansion remains both compliant and sustainable.