VIE Struct. Equity Tax Handling Are U Sure U Get It? Solving Tax Challenges in 1 Read

How Much Do You Know About Personal Income Tax on Equity Disposal under the VIE Structure? Exploring Tax Challenges and How to Respond

In recent years, as China’s new economy companies continue to grow, more and more startups have chosen to raise capital and go public overseas through the VIE Variable Interest Entity structure. This is especially common in sectors like internet services, education, and biotechnology. For these industries, the VIE model has become a key channel for accessing international capital markets.

However, with the widespread use of equity incentive plans and a growing trend of overseas IPOs, personal income tax issues related to equity disposal under the VIE structure have become increasingly prominent. These issues have drawn significant attention from entrepreneurs and senior executives alike.

What Is the VIE Structure?

In simple terms, the VIE structure is a way for offshore entities to control and consolidate the financial statements of a domestic operating company through contractual agreements rather than direct equity ownership. It is commonly used in industries where foreign investment is restricted or prohibited by Chinese law, such as internet information services and education.

Under this structure, founders or executives often hold shares through an offshore holding company and control the domestic operating entity via contractual arrangements. When these individuals sell their offshore shares, does that trigger a personal income tax obligation in China? This question has long been a topic of debate.

According to Chinese tax law, Chinese tax residents are required to pay taxes on income earned anywhere in the world. While the sale of offshore shares under a VIE structure technically occurs outside of China, the underlying value of those shares often stems from assets located in China. In some cases, tax authorities have clearly stated that such transactions should be taxed in China.

A Landmark Case in 2025

In 2025, China’s State Taxation Administration responded to a case involving the transfer of equity under a VIE structure. In that case, a founder made hundreds of millions of yuan by selling shares of an offshore holding company. The tax authority ruled that the transaction was essentially a disposal of assets located in China, and therefore should be taxed in China.

This case sparked widespread discussion and made many companies and executives realize that the VIE structure does not fully exempt them from tax obligations in China.

How Should Personal Income Tax Be Handled in Equity Disposal Under the VIE Model?

First, it’s important to clarify the taxpayer’s tax residency status. If the seller is a Chinese tax resident, they may be required to report and pay taxes in China regardless of where the asset being sold is located.

Second, the nature of the transaction must be evaluated. If the offshore company has no substantial business operations and exists mainly as a holding vehicle, and its main asset is equity in a Chinese domestic company, then the transaction may be considered an indirect transfer of taxable Chinese assets-triggering China’s right to tax.

When determining whether to impose tax, authorities also consider factors such as the structure of the deal, the composition of the assets, and the sale price. For example, if the offshore company owns multiple assets, only some of which are located in China, the tax authority may require a reasonable allocation and valuation, taxing only the portion related to Chinese assets.

How Should Individuals and Companies Respond?

Faced with these complex tax issues, individuals and companies must act proactively

1. Plan Tax Strategy in Advance

From the early stages of setting up a VIE structure, it’s essential to consider potential exit strategies and their tax implications. Professional tax advisors can help optimize the structure to minimize future liabilities.

2. Maintain Open Communication with Tax Authorities

Before any equity transfer, submit relevant documents to the tax bureau and apply for advance rulings or pre-agreed pricing arrangements. This can help reduce the risk of future tax audits or penalties.

3. Establish Robust Financial and Tax Management Systems

Keep detailed transaction records and contracts. In the event of a tax audit, these documents will be crucial in proving compliance.

4. Conduct Self-Reviews and Pay Back Taxes if Necessary

For past transactions that may have been underreported or unreported, it is advisable to conduct a self-audit and proactively pay any owed taxes to avoid greater legal consequences.

Cross-Border Tax Cooperation Is on the Rise

At the same time, China has been strengthening tax administration and deepening international cooperation. With the implementation of the Common Reporting Standard CRS and increasing information exchange between countries, personal financial assets and transactions overseas are becoming more transparent. This means that the old tactics of hiding assets in offshore companies to avoid taxes are becoming increasingly difficult to sustain.

Conclusion

While the VIE structure offers convenience for overseas financing and listing, it is not a tax-free zone. For individual shareholders, the issue of personal income tax during equity disposal cannot be ignored. As tax enforcement becomes more sophisticated and cross-border transactions come under closer scrutiny, both companies and individuals must take tax compliance seriously.

Only by planning ahead, operating in compliance, and carefully managing tax risks can individuals and companies protect their financial interests and ensure long-term stability in an era of tighter global tax oversight.