Previously, I introduced the relevant regulations (hereinafter referred to as: deemed distribution policy) and the historical context of the tax policy regarding the treatment of funds obtained by individuals from enterprises as distributions. During discussions, some tax professionals raised different opinions regarding the time limit for the tax obligations of deemed distribution. Taking this topic as an opportunity, I will start with the tax system for enterprise distribution and then try to explain the ambiguous expressions in the relevant regulations from the perspective of the legal system, clarify the relevant connotations, and hope to help further improve the quality of financial and tax legal services.

Some tax professionals believe that: In the deemed distribution policy, "Cai Shui [2003] No. 158" and "Guo Shui Fa [2005] No. 120" stipulate different time limits for treating loans from enterprises to investors as distributions, the former being limited to the tax year and the latter to one year. If a loan occurs on December 1, according to the former regulation, it will be overdue in less than a month, and may face being recognized as a distribution to individuals and subject to tax. However, if the loan occurs on January 1, there will be a one-year period. The same behavior may result in tax being supplemented for some loans after only one month, while others may not need to supplement tax for nearly a year, which makes it difficult to grasp the enforcement standards and easily creates new unfairness. If the regulation of one year limit is applied uniformly, the above problems will not exist. In particular, according to the principle that the later formulated legal norms are superior to the earlier ones, the latter regulation in the 2005 document, which limits overdue loans to one year, should be applied, rather than the former regulation in the 2003 document, which limits it to the tax year, i.e., December 31 of the current year.

1. Tax Logic of Deemed Distribution Policy

The purpose of introducing the deemed distribution policy is to prevent individual investors from disguising enterprise funds as their own, resulting in unfair distribution. The unfair distribution here is to solve the problem of not paying taxes at the time of distribution.

Let's first look at the different tax models for enterprises distributing to individuals. The concept of an enterprise in tax law is broader than the legal definition of enterprise types. For example, the partnership law firm where I practice is legally defined as a non-legal person professional institution, not an enterprise. However, from the perspective of tax identity, it is defined as an enterprise and implements relevant tax policies for partnership enterprises. Although the types of enterprises are different in the tax concept, from the perspective of taxation, they can be roughly divided into two categories: enterprises that implement enterprise income tax policies and enterprises that implement individual income tax policies. In addition, tax documents other than those involving individual income tax often use "individual" to represent individual industrial and commercial households, that is, individual production and business entities that have completed tax registration. Whether from a legal or tax perspective, individual industrial and commercial households do not belong to enterprises and cannot apply tax policies related to "enterprises". And the individuals we usually talk about are expressed as "other individuals" in these tax documents, which refers to natural persons, and attention should be paid to distinguishing them.

The most typical enterprises that implement enterprise income tax policies are limited liability companies, joint stock limited companies, and one-person limited liability companies. Their characteristic is that these enterprises have independent property, can independently bear economic responsibility, and have independent legal fictional personality, and are generally regulated by the "Company Law". The investors of these enterprises are the shareholders, who mainly obtain income from the enterprise through investment dividends. It should be noted here that dividends are conditional, that is, first, the enterprise has profits; second, after paying enterprise income tax, there is still a surplus after retaining sufficient statutory reserve funds; finally, the amount distributed to shareholders is also subject to individual income tax at a rate of 20% of the income under the "interest, dividends, and bonuses" item. Of course, individual shareholders can also be employed by the enterprise or provide individual labor for the enterprise, and ultimately be included in the comprehensive income and pay individual income tax at a progressive tax rate of 3-45%. That is to say, shareholders must pay taxes on legitimate income obtained from the enterprise, whether it is dividend income or labor income.

The most typical enterprises that implement individual income tax policies are sole proprietorship enterprises and partnership enterprises. The characteristic of these enterprises is that although they also have relatively independent property, due to their high degree of "harmony", investors and enterprise managers are often one and the same, enterprise decisions cannot be independent, and investor property is highly mixed, and the ability to bear debts is insufficient, that is to say, the enterprise does not have a legally fictional independent personality. The investors of these enterprises are mainly sole proprietorship owners or enterprise partners. The way they obtain income from the enterprise is different from the way corporate enterprises distinguish property income and labor income so clearly, and generally only involves the "production and operation" item. That is, if the enterprise has profits, it is first distributed to each investor according to the agreement or investment share, and each investor then pays individual income tax at a progressive tax rate of 5-35% of the income under the "income from production and operation" item. In other words, sole proprietorship owners or partners must, in principle, pay individual income tax on income obtained from the enterprise according to the income from production and operation. (The above does not include special circumstances such as rent and royalties obtained by investors from the enterprise)

Regardless of which of the above types of enterprises, investors, especially actual controllers, often have a strong say in the enterprise. The income that should have been obtained through distribution is taken out and used first in order not to pay taxes, as long as the enterprise does not fall, it will always be hung on the account, anyway, no one dares to urge the boss to repay the money, and the enterprise has become an ATM for the personal and family expenses of the bosses. According to our country's individual income tax system, whether through property or labor or even a windfall, as long as wealth increases, individual income tax will be involved except in statutory circumstances. Then those who have money obtain wealth through running an enterprise as an ATM without paying taxes, and those who have no money can only create wealth through hard work and honestly pay taxes, which is obviously unfair. Therefore, the state must of course introduce policies to solve this problem.

2. Core Content of Deemed Distribution Policy

First, the applicable objects of the policy are clarified. With the development of practice, the content of the deemed distribution policy has been continuously improved, from initially targeting only individual investors and their family members to extending to other personnel of the enterprise.

Second, the behaviors to be dealt with are visualized. It mainly solves two types of problems: actual possession and occupation of enterprise funds in the name of borrowing, specifically including four aspects: 1. Individual investors use enterprise funds to pay for consumption expenditures and purchase family property for themselves, family members and related personnel; 2. The enterprise invests in purchasing houses and other property, and registers the ownership in the name of the investor, family members of the investor or other personnel of the enterprise; 3. Individual investors borrow money from the enterprise they invest in for a long time without repaying; 4. Borrowing money from the enterprise to purchase houses and other property, and failing to return it in time after registering the ownership in the name of the investor, family members of the investor or other personnel of the enterprise.

Third, the tax items involving individual income tax are clarified. For the above-mentioned income obtained by individual investors or their family members of sole proprietorship enterprises and partnership enterprises, it is regarded as the profit distribution of the enterprise to individual investors, and individual income tax is levied according to the "income from production and operation" item; for the above-mentioned income obtained by individual investors or their family members of other enterprises, it is regarded as the dividend distribution of the enterprise to individual investors, and individual income tax is levied according to the "interest, dividends, and bonuses income" item; for the above-mentioned income obtained by other personnel of the enterprise, it is levied according to the "wages and salaries income" item.

Fourth, exemption conditions are set for loans. That is, the relevant loans are used for production and operation purposes.

Fifth, the deadline for treating loans as distributions is clarified. The deemed distribution policy uses three different expressions for the concept of overdue loans: the end of the tax year, more than one year, and the end of the loan year without repayment. Let's talk about how to understand the issue of policy application time limit.

3. Interpreting the Time Limit for Treating Loans as Distributions from a Legal Application Perspective

In the three currently effective tax regulatory documents, namely, "Finance and Taxation [2003] No. 158", "Guoshui Fa [2005] No. 120", and "Finance and Taxation [2008] No. 83", the actual occupation is based on the occurrence of the act as the time point for the occurrence of the tax obligation deemed as distribution, but the time limit for the tax obligation deemed as distribution of loans adopts three different expressions. The concept of "more than one year" in "Guoshui Fa [2005] No. 120" is the clearest, which means that the loan occurs for more than 365 calendar days; "the end of the loan year" in "Finance and Taxation [2008] No. 83" refers to the end of the calendar year, which is after December 31 of the year in which the loan occurred; "the end of the tax year" in "Finance and Taxation [2003] No. 158" is a concept in tax law. China's tax law stipulates that the tax year is the same as the calendar year and the accounting year. "The end of the tax year" means exceeding December 31 of the current year; however, the tax year has special circumstances. If the enterprise is cancelled or enters bankruptcy proceedings in the middle of the year, the tax year is limited to the actual duration, which is not equal to the calendar year. Under normal circumstances, the end of the tax year = the end of the loan year < more than one year. So how should these three time limits be applied, and how should conflicts be resolved?

First of all, according to the principle of priority application of high-level legal norms, the validity levels of the three documents all belong to tax regulatory documents, and there is no issue of priority application.

Secondly, the principle of the new law prevailing over the old law mentioned by financial and tax colleagues before is the principle of conflicting application when legal norms of the same level make different provisions on the same matter. The provisions on the loan term of investors in the "Finance and Taxation [2003] No. 158" document clearly exclude investors of sole proprietorship enterprises and partnership enterprises, that is, only for company-based enterprises in the usual sense; the provisions on the loan term of investors in the "Guoshui Fa [2005] No. 120" document, although the scope of investors is not clearly defined, this content belongs to the fourth item under Article 35, and the expression content of Article 35 is "Strengthen the collection and management of individual income tax for individual industrial and commercial households, investors of sole proprietorship enterprises and partnership enterprises, and individuals engaged in independent labor activities." Therefore, in the context, the individual investors here only refer to investors of sole proprietorship enterprises and partnership enterprises. Since the objects applied by the two regulations are different, there is no conflict in the application of legal norms.

Furthermore, the application of the principle of special provisions prevailing over general provisions. The "Finance and Taxation [2008] No. 83" document does not distinguish the concept of investors, which means that it includes both corporate investors who apply the corporate income tax policy and corporate investors who apply the individual income tax policy. However, this document only targets the occupation behavior of using loans to purchase real estate, etc., which is registered as a sign of ownership confirmation, which belongs to special provisions, while the previous two documents on loans "for non-production and operation purposes" belong to general provisions. When the time limits stipulated by the two are inconsistent, the special provisions should be applied in accordance with the principle of special prevailing over general. For example, a partner enterprise investor borrowed money from the enterprise on December 1 of the current year to buy a car for his family, and the car was registered in the name of the family member. This behavior not only meets the circumstances of the "Guoshui Fa [2005] No. 120" document, but also meets the application conditions of the "Finance and Taxation [2008] No. 83" document, that is, this behavior not only belongs to the general premise of "for non-production and operation purposes", but also is further used to purchase property that requires registration as a requirement and is registered in the name of others. According to the principle of special prevailing over general, the provisions that the end of the loan year is deemed to be overdue should be given priority, instead of being deemed to be overdue until one year after December 1 of the following year.

In summary, the deemed distribution tax policy has comprehensively solved the problem of disguised occupation of enterprise funds without paying taxes. However, after all, economic behaviors vary greatly, and related norms cannot include them all. For example, loans are borrowed in the name of investors' family members, whose identity is neither an investor nor an employee of the enterprise. Although they are used for personal consumption, they are not used to obtain various types of property that require registration as a requirement. Looking at the deemed distribution tax policy, there is really no provision that can be applied. In addition, there are many disputes over the identification of whether loans are used for production and operation. How to balance the principle of "anything is permissible unless expressly prohibited by law" in administrative law and the principle of "substance over form" in tax law, and what substantive behaviors of individuals obtaining funds from enterprises may affect the characterization, we will discuss it in the next issue in conjunction with previous inspection cases, so stay tuned.

1. Notice of the Ministry of Finance and the State Administration of Taxation on Regulating the Collection and Management of Individual Income Tax for Individual Investors (Cai Shui [2003] No. 158)

2. Notice of the State Administration of Taxation on Issuing the "Measures for the Administration of Individual Income Tax" (Guo Shui Fa [2005] No. 120)

3. Reply of the Ministry of Finance and the State Administration of Taxation on the Issue of Collecting Individual Income Tax on Enterprises Purchasing Houses or Other Properties for Individuals (Cai Shui [2008] No. 83)