THE LAW SCHOOL OF NANKAI UNIVERSITY GUANG PING, YANG 5/13/2011

1. Research on Tax Law System of Transparent Entityin ChinaOn The Basis of Analyzing The Pass-Through Taxation System of Partnership Enterprise in China THE LAW SCHOOL OF NANKAI UNIVERSITY GUANG PING, YANG 5/13/2011

2. The Definition of “Transparent Entity” (CFR －§ 1.894-1) an entity is fiscally transparent under the laws of the entity's jurisdiction /with respect to an item of income/ to the extent that the laws of that jurisdiction require the interest holder in the entity, wherever resident, to separately take into account on a current basis the interest holder's respective share of the item of income paid to the entity, whether or not distributed to the interest holder, and the character and source of the item in the hands of the interest holder are determined as if such item were realized directly from the source from which realized by the entity. Personal Opinion on defining the concept of “transparent entity” • Firstly, it is an entity (which is distinguished from individuals-”self-employed entrepreneur”, or individual enterprise, and the partner provided in civil law of china), while, such entity is determined as legal form by private law system (in other words, that is a form provided by business laws and other enterprise laws); (사법의 법형식 or 법실체) • Secondly, the substance of “transparency” is stressed here that it is a actually technical means in taxation law, through this technical means, an item of income received from entity is reflected directly in the calculation of income on the level of interest holder in order to achieve the tax purpose(in the other words is called “fiscally”). (조세법적 기술수단(pass-through방식)을 통해,조세법 목적를 실현)►continue

3. Fundamental Type of “Transparent Entity”in Modern Chinese private law In Chinese law System In China, there is only one type of legal form of partnership (including GP & LP) is used for the tax purpose on fiscally "transparent entities “. Comparative Study on foreign Law: In tax law system of United StatesIn tax law system of The United States, the fiscally transparent entity is including limited liability partnership, the general partnership, limited liability company, common investment trust, grantor trust. In tax law system of JapanOn Japanese tax law study, the fiscally "transparent entities " is including the “special purpose trust”, “special purpose companies”, “investment business limited partnership”, Japanese silent partnership( called ‘tokumei kumiai’익명 조합) et cetera. Back to

4. Table of Contents Ⅰ.Introduction (Problem Awareness)click Ⅱ.Formation & Characteristics of “Transparent Entity” in Chinese Private Law Ⅲ. Taxation Structures & Rules for Transparent Entity Ⅳ.The Development of The Theory of The Transparent Entity - Theory of “Trialism of Taxpayer classification” Ⅴ.Main Problems of Partnership Taxation System in China Ⅵ. Conclusion

5. Awareness of Problem Private law purpose • To promote the development of SME（Small and Medium Enterprises）in China, （중소 기업 발전 촉진） • To create a vehicle of economic activities accord with the demands of the Chinese market economy.（경제 활동의 매개체） Tax purposes • To achieve fairness on tax law, and creating the equal tax environment between SME and other enterprises; (각 경제 주체의 세 부담의 공평) • the second is that the tax law system which is scheduled out for SME should be consistent with substance of economic activities. (사법 주체의 경제 활동의 실질에 따르는 세제 의 설계)Next

6. Ⅰ Introduction Awareness of Problem Could The China's Existing Partnership Taxation System Promote the development of the Small and Medium scale enterprises? Whether the Chinese current partnership enterprise income tax law system is in compliance with the private law purpose and tax law purpose or not? Next

7. Ⅱ Formation & Characteristics of “Transparent Entity” in Chinese Private Law • The Creation of Partnership Entity & The Development of Legislation In China NEXT • The Characteristics and The Structure of Partnership Entity In Business Organization Law System (1) The Type of Partnership Entity  (2) The Partner  (3) The Establishment of partnership  (4) Allocation of the profits in Partnership   (5) The share Transfer of interest holder

8. The legal form of EnterpriseIn Modern Chinese private law system Created by Civil law Public Institutions, Social Organizations Created by business law – type one: the legal form of enterprise with Chinese Characteristic 중국 특색의 사법 주체 • state-owned enterprises(1988), collectively-owned enterprise(1991), private enterprises(1988) • Foreign-invested enterprises(1980, 1988, 1986)(such as Sino-foreign joint venture, Sino-foreign joint cooperative ventures, solely foreign-owned enterprises ). Created by business law – type two: general sense of the classification(after 1993- market economy) • Corporation(1986), Partnership(1997), sole proprietorships(2000), Trust(2006) The Taxpayer classification for Tax Purpose In Modern Chinese Tax Law System For Tax Purpose Treatment as “Non-Entity”(Individual) Treatment as “Entity” Treatment as Transparent Entity next

9. Legal System of Partnership in China & The creation of legal form • Partnership business law of the People's Republic of China • Measures for the Administration of Registration of Partnership Businesses of the People's Republic of China • Administrative Measures for the Establishment of Partnership Enterprises within China by Foreign Enterprises or Individuals 1997 PARTERNERSHIP THE CREATION OF ONE OF PRIVITE LEGAL FORM NEXT

10. The Characteristics and The Structure of Partnership Entity In Business Organization Law System (1) The Type of Partnership Entity & The Partner "partnership enterprise" refers to the general partnership enterprises and limited liability partnership enterprises which are established within China by natural persons, legal persons and other organizations in accordance with the law. A general partnership enterprise A limited liability partnership enterprise shall be formed by general partners and limited partners. The general partners shall bear unlimited joint and several liabilities for the debts of the limited liability partnership enterprise. The limited partners bear the liabilities for its debts to the extent of their capital contributions. (2) The Establishment of partnership A partner may make capital contributions in money, in kind, or intellectual property right, land use right or other properties, or labor services. No limited partner may make capital contributions in labor services. (3) Allocation of the profits in Partnership The distribution of profits or sharing of losses of the partnership enterprise shall follow the stipulations of the partnership agreement. If it is not stipulated or not expressly stipulated in the partnership agreement, a decision shall be made by the partners through negotiation. In case the negotiations fail, the distribution of profits or sharing of losses shall be made in proportion to the actual capital contributions made by the partners. If it is unable to determine the proportions of capital contributions, the profits or losses shall be distributed or shared equally by the partners. It shall not be stipulated in any partnership agreement that all profits will be distributed to some of the partners or that some partners will bear all losses.(4) The share Transfer of interest holder

11. Ⅲ Taxation Structures & Rules for Transparent Entity • The Changes From “Entity Taxation“ to “Transparent Entity Taxation” (NEXT) • The Structure of Pass-Through Taxation (NEXT) (1) Taxpayers(2) The Operation of Enterprise (3) The Distribution of Profits(4) Transactions between Partner & Partnership (5) The Liquidation of Partnership

12. Tax law System of Partnership in China • Law of the People's Republic of China on Individual Income Tax • The provision on imposing the individual income tax to sole proprietorship and partnership investors" • Notice of the Ministry of Finance and State Administration of Taxation on Adjusting the Pre-tax Deduction Criterions regarding the Individual Income Tax on Individual Industrial and Commercial Households, Sole Proprietorships and Partnership Enterprises     before 2000 (treatment as entity ) Imposed the enterprise income tax on partnership after 2000 (treatment as individual) ) Imposed the individual income tax on partnership NEXT

13. The Characteristics and The Structure of the tax law on Partnership enterprise (1) Taxpayers Each Partner is tax obligor in the partnership , a natural partnership has to pay personal income tax ; partner which is a corporation or other organization have to pay enterprise income tax. (2) The Operation of Enterprise Income is from the balance which is the gross income of each tax year earned by the Partnership from the production and operation deducted from the costs, expenses and losses, is as. Tax rate is 5%-35% (3) The Distribution of Profits To determine the amount of taxable income in accordance with the following principles in the partnership：in accordance with the allocation of the partnership agreement to determine taxable income (4) Transactions between Partner & Partnership The principle of independent enterprises- (1) according to pricing for the same or similar business transactions between independent enterprises; (2) according to the profit margin obtainable if reselling the goods to a non-affiliated third party; (3) according to the cost, plus reasonable expenses and profit; (4) according to other appropriate methods. (5) The Liquidation of Partnership

14. Ⅳ The Development of The Theory of The Transparent Entity – “Theory of The Trialism of Taxpayer classification” 1. The Dualism of Taxpayer classification & The Trialism of Taxpayer classification（과세 주체의 이원 구분론에서 삼원 구분론로 전환）NEXT 2. The Basic Requirements on “Transparent Entity” Rules

15. Diversification of legal form The characters of diversification is that many new legal forms were created by private law, and the legal character of these forms have changed （사법상의 기업 형태의 다양화） For example, like LLC, it has qualification as a legal person (법인 형태)in private law form, but the economic substance (경제 실질)is essentially a partnership; or like some very large scale partnerships, it’s private form is a partnership, but the economic substance is very close to the company. In this case, how to determine it according to the tax purposes? NEXT

16. Problem In Chinese tax law system (including Japan and South Korea), the usual way to determine an economic organization, that is whether a entity or not , are based on private law form (legal personality), and is not based on its economic substance, it also means that there is no criterion on taxation law (실체 과세 여부는 사법상의 판단 기준에만 따르는이 조세 법상의 판단 기준은 없다) So there is not a tax law form that was designed like “transparent entity” outside the private law form. It is for this reason, that there is no a concept of "transparent entity" in Chinese tax system, and also do not create the tax regulations for transparent entity for tax purpose. In other words, the tax purpose is not clear in current Chinese tax law system (조세법상 법적형태의 형성과 사법적 법형태에서 조세법적형태로 전환 필요) NEXT

17. Problem Currently, a common practice in the tax system is to contrast a new private lawl form with existing enterprise income tax or personal income tax. The result is that this is not conducive to the development of SME, and to realize the fairness in tax burden. For this reason, using private forms to conduct tax avoidance in the areas of domestic and international.

18. Ⅴ Main Problems of Partnership Taxation System in China 1. Identify the Nature of partnership2. The problems on The scopes of Partners3. The problems on Tax Avoidance and Anti-Tax Avoidance

19. Ⅵ Conclusion For establishing a fair, neutral and simple tax system environment for the development of SME, it should be making the tax reform on partnership taxation according to the enterprise's substantial investment content, Economic substance and Legal characteristics.

20. THANK YOU!