In the previous two issues, the author, combined with the case of a company's shareholders' family members long-term loan not being repaid, being pursued by the tax inspection department for individual income tax and late payment fees according to "interest, dividends, and bonuses" income, and the company being identified as tax evasion and subject to tax administrative penalties for failing to fulfill the withholding obligation, introduced the tax law evolution of the policy of treating funds obtained by individuals from enterprises as distribution, as well as the relevant tax regulatory documents on the provisions of different deemed distribution time limits applicable to different types of subjects and different conditions. In this issue, the author attempts to use one of the basic principles of tax law to explore the boundary of the deemed distribution in tax law for individuals obtaining funds from enterprises, thereby generating individual income tax obligations, and also puts forward some personal opinions on the case from the perspective of tax legality and substantive taxation. Any inappropriateness is welcome for correction.

1. Understanding and Application of "Substance Over Form" in Tax Law

As a basic principle in international accounting standards, the "substance over form" principle is of course also an important principle followed by China's enterprise accounting standards, meaning that enterprises should conduct accounting based on the economic substance of transactions or events, and should not only use their legal form as the basis for accounting. Due to the inseparability between tax and accounting, many people naturally believe that the principle of "substance over form" in accounting is almost the same in tax treatment. So, does tax law have the concept of "substance over form"? Actually, it does. The standardized term in tax law is the "substantive taxation" principle, which means that it should be determined whether the taxation elements are met based on objective facts, and the taxpayer's tax burden should be determined based on the taxpayer's true ability to pay, and not only consider the relevant appearance and form. However, the "substance over form" in accounting and the "substantive taxation" principle in tax law are not just different in name, the key difference between the two lies in the completely different application scenarios.

From an accounting perspective, since economic activities are ever-changing, accounting standards cannot exhaust and unify the specific models of accounting, so the "substance over form" principle gives accountants a large space for professional judgment, with the aim of more fairly reflecting economic results. That is to say, as an economic management activity, the "substance over form" principle in accounting is mainly applied at the operational level.

From the perspective of taxation, due to the continuous changes in economic life, coupled with some objective factors or artificially disguised different forms to evade tax burdens, which may cause tax losses, or only from the perspective of elements, it meets the tax conditions but should not actually generate tax obligations, resulting in unfair tax burdens, it is very necessary to examine its substantive behavior to determine whether it constitutes a taxation element instead of sticking to external formal elements. But we should note that as one of the basic legal principles, the principle of tax legality is a crucial link in building a national governance system, so the "substantive taxation" principle in tax law is mainly reflected at the legislative level, which is the opposite of accounting. At the operational level, that is, in the field of law enforcement, the "substantive taxation" principle should be used with caution in tax law to compress the arbitrary judgment space of law enforcement personnel, in order to reflect the authority, standardization, stability, and predictability of the law.

2. Looking at Individual Borrowing from Enterprises from the Perspective of "Substance Over Form"

Let's look at the different situations of individuals borrowing from enterprises, what kind of financial and tax impacts will occur, which will help to understand where the substantive problem that the tax policy of treating funds obtained by individuals from enterprises as distribution needs to solve lies.

(1) Individual borrows from an enterprise for production and operation

First of all, the accounting treatment for individuals obtaining loans is:

Debit: Other receivables (XX person's petty cash or loan)

Credit: Bank deposit or cash on hand

Secondly, individuals use the loan to obtain expense vouchers for production and operation activities to carry over costs and expenses. The accounting treatment is:

Debit: Cost of main business or sales, management expenses

Credit: Other receivables (XX person's petty cash or loan)

According to the formula of income - cost, expenses = profit, the borrower converts the company's funds, that is, the company's assets, into a production cost or operating expense. Since costs and expenses belong to profit and loss accounts, they will inevitably affect profits, thus generating a tax effect. In other words, individuals borrow from enterprises for production and operation activities. In theory, the enterprise generates profits, then the enterprise, whether through enterprise income tax or individual income tax on production and operation income, this individual's use of funds has a legitimate tax effect, which is recognized by the tax law.

(2) Individual borrows from an enterprise and pays interest

According to the regulations in the appendix of the "Notice of the Ministry of Finance and the State Administration of Taxation on Comprehensively Promoting the Pilot Program of Replacing Business Tax with Value-Added Tax" (Cai Shui [2016] No. 36): If a unit or individual business provides services to other units or individuals free of charge, it needs to be regarded as sales service, except for those used for public welfare or the public. Whether an enterprise charges interest or not for borrowing from an individual is a VAT taxable activity. If there is no interest, interest should also be calculated according to the loan interest rate of the same period and VAT should be paid according to the loan service.

First of all, the accounting treatment when an individual obtains a loan is:

Debit: Other receivables (XX person's loan)

Credit: Bank deposit or cash on hand

Secondly, when an enterprise charges interest according to tax law, the accounting treatment is:

Debit: Bank deposit

Credit: Taxes payable - VAT payable

Financial expenses - interest or other business income - interest

According to the profit formula, an individual borrows from an enterprise and pays interest, which brings an increase in the enterprise's income or a decrease in expenses. As mentioned above, due to the changes in profit and loss accounts, it will inevitably affect profits, thus generating a tax effect. That is to say, although an individual borrows from an enterprise and does not use it for production and operation, but pays interest recognized by the tax law, in theory, the enterprise will also generate profits, then the enterprise, whether through enterprise income tax or individual income tax on production and operation income, can also reflect this individual's use of funds through taxation, which is also recognized by the tax law.

(3) Individual borrows from an enterprise for a long time without compensation

The accounting treatment of the enterprise when an individual obtains a loan is:

Debit: Other receivables (XX person's loan)

Credit: Bank deposit or cash on hand

Failure to repay a loan is often referred to as a long-term outstanding account. Unlike the previous two situations, the company's accounting treatment only reflects the first half of the money being lent out, without reflecting what the second half of the money has been converted into or what benefits it has generated. Bank deposits, cash on hand, and other receivables are all asset categories. A decrease and an increase do not involve profit and loss items, so accounting will not affect profits, and theoretically, there will be no income tax matters. That is to say, if an individual borrows money from a company free of charge, and the company does not charge interest as required by tax laws, but treats it as an outstanding account, it will not generate income tax burden, then the individual's capital utilization behavior cannot be reflected in taxation. However, we know that capital itself has value, and there is interest even when it is placed in a bank. This kind of uncompensated occupation behavior, lightly speaking, occupies the time income of the enterprise's capital, and heavily speaking, it directly occupies the enterprise's assets as its own, and these are all elements of taxation, thus creating a contradiction in which there is no need to pay taxes in form but should be taxed in substance.

3. Conditions for considering funds obtained by individuals from enterprises as distribution for tax purposes

Different from laws that adjust and regulate corporate management and economic order, tax law does not correct related economic behaviors. It does not judge the tax relationship between the state and taxpayers based on the should-be state of related laws, but based on the actual economic form. For example, Article 115 of the "Company Law" stipulates that a company shall not directly or through its subsidiaries provide loans to directors, supervisors, or senior managers. If a company lends money to a director, the tax law does not negate the corresponding tax obligation because it violates the provisions of the Company Law, but makes a judgment based on the tax law system.

It is based on the differences between form and substance in the actual state that the principle of "substance over form" plays an important role in the tax system, especially at the level of tax legislation. The tax policy of treating individual borrowing from enterprises as distribution is a typical embodiment of the principle of "substance over form" at the specific tax legislation level. The three tax normative documents, "Cai Shui [2003] No. 158", "Guo Shui Fa [2005] No. 120", and "Cai Shui [2008] No. 83", are not aimed at borrowing for production and operation, nor are they aimed at genuine lending relationships between enterprises and individuals, but to solve the problem of individuals "occupying enterprise funds for a long time without compensation" and "distributing in the name of borrowing", which do not need to pay taxes in form but should be taxed in substance.

First of all, if an individual borrows money from an enterprise for production and operation activities, there is no problem of the individual occupying the enterprise's funds for a long time, naturally does not meet the tax policy of considering it as distribution, and there is no basis for generating individual income tax obligations.

Secondly, if an individual borrows money from an enterprise and pays interest that complies with tax laws, it does not belong to the situation of occupying the enterprise's funds for a long time without compensation, nor does it meet the tax policy of considering it as distribution, and will not generate individual income tax obligations.

Third, if an individual borrows money from an enterprise without paying interest or paying interest that is significantly lower than the tax law stipulates, it belongs to the behavior of occupying the enterprise's funds. As for whether it belongs to a long-term judgment, according to the provisions of the three tax normative documents for considering it as distribution, a company system enterprise can be identified as long-term if it exceeds December 31 of the current year, and a non-company system enterprise can be identified as long-term if the loan exceeds 12 months. If these conditions are met, the tax law clearly generates individual income tax obligations.

Fourth, if an individual uses enterprise funds for consumption expenditures unrelated to production and operation, it is essentially a distribution behavior, and the tax law stipulates that it should be implemented in accordance with the provisions on distribution in individual income tax.

Fifth, if an individual borrows money from an enterprise for consumption expenditures with registration requirements such as real estate, once it is not repaid after December 31 of the current year, the tax law recognizes that it is distributing in the name of borrowing and should be implemented in accordance with the provisions on distribution in individual income tax.

Returning to the tax inspection case we introduced in the first issue, the company shareholder's father borrowed money from the company for a long time without repayment. The basis for the tax penalty decision is Article 2 of the "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), that is, if an individual investor borrows money from its invested enterprise (excluding sole proprietorship enterprises and partnership enterprises) within the tax year, and neither returns it after the end of the tax year nor uses it for the enterprise's production and operation, the unreturned loan can be regarded as the enterprise's dividend distribution to the individual investor, and individual income tax shall be calculated and levied according to the 'interest, dividend, and bonus income' item.

However, in this case, the shareholder's father is not a shareholder, that is, the individual investor pointed to in the basis, so how can he apply the "interest, dividend, and bonus income" tax item? The author believes that the object of tax recovery in this case is worth discussing. Since the full text of the penalty document has not been disclosed, the author guesses that the inspection personnel have found out the fact that the shareholder borrowed money in the name of his father through records, bank accounts, etc. After all, which enterprise would lend money to others for so long without urging repayment based on the shareholder's relationship? Although everyone understands this situation, in the law enforcement process, it cannot be simply determined that the shareholder's father and the shareholder are the same thing based on the principle of "substance over form", but should restore the facts through law enforcement evidence collection. If it is confirmed that the shareholder borrowed money in the name of his father without repayment, the taxpayer should be the shareholder himself instead of his father, and it should be explained in the law enforcement document; if there is no evidence in this regard, his father is neither a shareholder nor an employee, according to the three tax normative documents for considering it as distribution, there is no direct basis for requiring his father to treat it as distribution and make up for individual income tax, and the enterprise does not have to bear the obligation of withholding and paying, and it loses the basis for characterizing tax evasion and imposing penalties. Of course, the tax authority can separately pursue the enterprise's tax liability for lending funds without collecting interest according to law. After all, the principle of "substance over form" has given full support to both the levy and payment parties at the legislative level. In the law enforcement process, we should follow the principle of tax legality and emphasize administration according to law.

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 Levying Individual Income Tax on Enterprises Purchasing Houses or Other Properties for Individuals (Cai Shui [2008] No. 83)

4. Double Publicity of Credit Information of Guangdong Provincial Taxation Bureau of the State Administration of Taxation: Administrative Penalty Decision Huishuiyi Inspection and Punishment [2022] No. 158