Laws of the People's Republic of China

Reply to Problem of Taxation on Individual Liquidated Damages Obtained from Transfer of Individual Shareholding

Guo Shui Han [2006]No.866

Sichuan Local Administration of Taxation:

We have received the "Request for Problem of Taxation on Individual Liquidated Damages Obtained from Transfer of Individual Shareholding" (Chuan Di Shui Fa [2006] No. 48) submitted by your administration. After study, we give the reply as follows:

According to related regulations in the Law of the People's Republic of China on Individual Income Tax , after successfully transferring shareholding, liquidated damages the transfer party obtains from the accept party because the failure of payment on time, are regarded as income obtained from possession transfer. The liquidated damages of transfer party shall merge into possession transfer income, and the taxation is calculated according to the item of "income from possession transfer". The transfer party, who obtains the liquidated damages, shall make the declaration and pay the tax to the taxation organ in charge.

The State Administration of Taxation

September 19, 2006