The company has been losing money, its assets have shrunk, and the foreign investor wants to exit by selling its capital stake for far less than it contributed. Commercially, that price makes complete sense. For tax, it walks straight into the zone the tax authority suspects most: below-cost transfers are the classic signal of transfer pricing and understated transaction values. The question is not ‘may one sell cheap’ – but ‘can the cheapness be proven real’.
This article answers the four questions of an investor selling capital below cost: will the tax authority re-assess the price on a below-cost sale; how to prove the low sale price is justified; what the tax authority bases a transfer price assessment on; and if the assessment is wrong, how the complaint and litigation sequence runs.
Applicable Legal Framework
The framework is Tax Administration Law 108/2025/QH15 (replacing Tax Administration Law 38/2019/QH14, effective from 1 July 2026 in the tax administration reform process): the tax authority may assess tax and determine transaction prices in statutory cases, typically where the taxpayer declares a transfer price inconsistent with ordinary market transaction prices, where a connected-party transaction fails the arm’s length principle (the market price between independent parties), or where the transaction’s true value cannot be determined. For foreign-side capital transfer income, the tax duty is determined on the actual transfer price; if the declared price is below market price without reasonable grounds, the tax authority re-determines at market price and collects the difference with late payment interest and understated-declaration penalties as prescribed.
One distinction must be drawn sharply: selling below COST (the contributed capital amount) is not the same as selling below MARKET PRICE. Cost is a historical expense; the market price of a chronically loss-making, debt-laden company can be far below cost – and in that case the low price IS the correct market price. Assessment risk arises only where the declared price is below the determinable market price of the stake at transaction time. The seller’s entire defensive strategy therefore lies in building an independent market valuation dossier, contemporaneous with the transaction, proving that an independent buyer would pay only that much for a stake in a company in that financial condition.
Detailed Answers to Practical Questions
Will the tax authority assess the price when capital is sold below cost?
It may – but not every below-cost sale is assessed, and the tax authority does not assess by reference to cost either. Understand the mechanism correctly: the capital transfer tax duty is computed on the transfer price; where the taxpayer declares a price inconsistent with ordinary market transaction prices, the tax authority assesses under Tax Administration Law 108/2025/QH15 to re-determine the price at market price at transaction time. Cost (the originally contributed capital) is not the measure of assessment – a company whose accumulated losses have eroded most of its capital can have a market stake value of only a small fraction of cost, and the competent tax authority must respect that market value if properly proven. Conversely, high assessment-risk situations include: selling to a related party at an abnormally low price versus the company’s remaining net assets; the company holding valuable assets (land, licenses, valuable contracts) while the capital sale price is unbelievably low; the declared price being lower than the valuation in the group’s own internal reports; and transactions with no recorded negotiation or valuation process. When assessed, consequences include: back taxes on the difference between the assessed and declared prices, late payment interest on the arrears, and administrative tax penalties for incorrect declaration leading to tax shortfall under the current framework. An important mitigating point: if the seller has a full valuation dossier and declared honestly on that basis, a pure valuation disagreement with the tax authority is entirely different from tax evasion – and that distinction directly affects penalty levels and any heavier liability consideration.
How can a low sale price be proven justified?
With a dossier built BEFORE and AT transaction time, not patched together after an inspection begins. Five core components. One, an independent appraisal organization’s valuation certificate of the stake/enterprise value near the transaction date, using a method apt for a loss-making enterprise (adjusted net asset value usually persuades more than discounted cash flow when cash flows are negative) – this is the central evidence. Two, the target company’s audited financial statements for recent years showing accumulated losses, equity status, debts, and contingent obligations – explaining why a buyer would not pay at cost. Three, evidence of a real market process: records of offering the stake to multiple parties, letters of interest/quotations from independent parties, price negotiation minutes – proving the low price is a market outcome, not a private understanding between related parties. Four, documents explaining price-depressing factors: loans and guarantees, loss-making contracts, ongoing disputes, environmental/compliance obligations, sector outlook – each factor supported by source documents rather than mere narrative. Five, consistency throughout: the price in the contract, in the investment registration/IRC adjustment dossier, in the tax declaration, and in both sides’ books must be ONE figure with the same basis – divergence between dossiers is the strongest red flag for the tax authority. For connected-party transactions, the dossier must additionally meet the transfer pricing documentation standards under the tax administration rules for enterprises with connected transactions; and even where the buyer is independent, keeping this dossier ready is the cheapest shield compared with the cost of an assessment dispute later.
What does the tax authority base a transfer price assessment on?
Under Tax Administration Law 108/2025/QH15’s mechanism and management practice, the tax authority builds the assessed price from comparison data sources and market price determination methods. Commonly used bases include: (1) prices of similar capital transfer transactions on the market in the same period (comparison transaction data the tax authority collects from other enterprises’ declaration files and from registration agencies); (2) the enterprise’s net asset value per financial statements at transfer time, adjusted to market value for material assets – especially land-use rights and assets booked at historical cost far below market; (3) valuation results the tax authority itself organizes or commissions from an appraisal organization when enterprise value must be re-determined; (4) the taxpayer’s own divergent internal data: values recorded in connected transaction reports, in bank loan dossiers (where the stake/assets were valued high for borrowing), in other share transactions of the same group in the same enterprise; and (5) abnormal transaction signs: a related-party buyer, roundabout multi-tier payment, a price many times below charter capital while the enterprise has no corresponding losses. A seller who understands this sees clearly: the most effective defensive dossier is not abstract argument about ‘freedom to set prices’, but presenting a methodical, evidenced, verifiable market valuation – putting the tax authority in the position of having to rebut a grounded valuation instead of filling a valuation vacuum. A valuation vacuum is the ideal environment for assessment; a quality independent valuation is the most practical barrier.
How does one complain if the tax assessment is wrong?
Through a two-tier sequence mandatory in order, and the taxpayer must follow that order. Tier one – administrative complaint under the 2011 Complaints Law: the taxpayer complains first to the tax authority that issued the assessment decision (its head settles the first complaint); if disagreeing with the first settlement result or if the period lapses without settlement, a second complaint goes to the directly superior tax authority. The complaint time limit is 90 days from receiving the administrative decision or knowing of the decision/administrative act. During complaint over an assessment and back-tax decision, the enforcement regime applies per tax administration law: the tax decision must still be performed while complained of, except where deferred/suspended as prescribed – the taxpayer needs specific advice on payment duties during the dispute to avoid enforcement measures. Tier two – administrative lawsuit at Court under the 2015 Administrative Procedure Law: the taxpayer may sue the assessment/complaint-settlement decision at the competent People’s Court; the ordinary administrative lawsuit time limit is 1 year from receiving or knowing of the decision. The evidence strategy for both tiers is one: attack the METHOD and DATA of the assessed price – the tax authority assessed on non-comparable transactions, on asset values unadjusted for debts and accumulated losses, or ignoring the taxpayer’s contemporaneous independent appraisal – while proving the declared price has a market basis with the valuation dossier prepared before the transaction. A note on resolution reality: transfer price assessment disputes are often lengthy and cost valuation experts for both sides; many cases end with the tax authority partially adjusting the assessed price when the taxpayer presents a persuasive independent valuation right at the complaint tier – one more reason to invest in the valuation dossier when structuring the deal, not only upon receiving an assessment decision.
Action Checklist
- Commission an independent valuation of the stake/enterprise right at deal structuring time for a below-cost sale – do not wait for inspection
- Keep real market process evidence: offers to multiple parties, independent quotations, negotiation minutes – proving the price is a market outcome
- Attach audited financial statements (accumulated losses, debts, contingent obligations) as the justification basis for the low price in the deal dossier
- Keep ONE consistent price figure across the contract, investment dossier, tax declaration, and both sides’ books – divergence is a red flag
- For connected-party deals: prepare transfer pricing documentation to the standards for enterprises with connected transactions
- Do not confuse: below-cost does not automatically mean assessed – risk lies only in the part below the provable MARKET price
- If assessed: first complaint within 90 days under the Complaints Law, second complaint to the superior level, then administrative lawsuit within the 1-year limit
Frequently Asked Questions
The company has lost nearly all its capital; selling the stake for a symbolic USD 1 – is that a problem?
A symbolic price is the highest assessment-risk zone and should be used only when the stake’s true market value approximates zero or is negative – e.g. negative equity after deducting all debts and obligations, with no assets of significant liquidation value remaining. Even then, the USD 1 price must be backed by an independent appraisal certificate concluding the stake value at the corresponding level and financial dossiers proving the negative-equity state. If the enterprise still holds valuable assets (land-use rights, equipment, contracts, brand), a symbolic price will almost certainly be re-determined by the tax authority at net asset value adjusted to market, with back taxes and late payment interest.
The buyer is another subsidiary in the same group; does a below-cost sale add risk?
It adds a full additional risk layer: connected transactions. Where seller and buyer are related parties, the transfer price must observe the arm’s length principle under Tax Administration Law 108/2025/QH15 and the tax administration rules for enterprises with connected transactions – i.e. the price must equal what independent parties would agree for a similar stake. Selling below cost to a related party while the stake’s market value is higher is the textbook assessment case; conversely, if an independent valuation proves the market value truly is low (because accumulated losses eroded the capital), the connected transaction still stands – provided the transfer pricing dossier is prepared and archived to standard for presentation when the tax authority requires it.
Tax was paid on the declared price and arrears were collected after inspection – is that punished like tax evasion?
Two levels must be distinguished. Declaring on a grounded valuation with honest dossiers, but the tax authority rejects the valuation conclusion: the tax difference is collected with late payment interest; penalties for incorrect declaration leading to tax shortfall may apply depending on circumstances, but this is not tax evasion absent deceit (declaring one price while truly agreeing another, false documents). Tax evasion is considered only with fraudulent acts such as dual-price contracts, concealing the true transaction value, or colluding with the buyer to overstate costs – those acts are punished far more heavily and may be considered for criminal liability at statutory thresholds. This is why dossier honesty and consistency matter more than any valuation technique.
This article has been quality-reviewed by the FLAW AI Legal Council
