What Is a Related Party Transaction?

Related party transactions refer to the transfer of resources or obligations between related parties, regardless of whether or not the price is charged. Related party transactions are a unique form of transaction with two-sided characteristics, which are embodied in the following aspects: from the perspective of institutional economics, compared with independent transactions that follow market competition principles, the information costs and supervision costs of transactions between related parties And management costs should be less, and transaction costs can be saved. Therefore, related party transactions can be used as the basic means for maximizing the profit of the company group. From a legal perspective, although the two parties of related party transactions are legally equal, in fact, But it is unequal. Under the inducement of self-interest, related parties often abuse their control of the company, causing related party transactions to violate the equivalent paid commercial terms, leading to the occurrence of unfair and unfair related party transactions, which in turn damages Legal rights of the company and other stakeholders.

Related party transactions

In China, related party transactions exist extensively in the daily business operations of listed companies, and related party transactions between listed companies and controlling shareholders have their deeper roots. China's stock market was established as a result of the reform of the economic system and developed as a result of the reform of state-owned enterprises. Its design and organization are not carried out in a completely market-oriented manner, as in European and American countries, but with a distinctly planned economy and administrative control. Financing is the main purpose of corporate restructuring and listing. This led to the original company implementing a shareholding system solely for the purpose of listing and financing, the system reform and mechanism conversion were not thorough, and it remained only on the surface and form, resulting in a large number of unfair related party transactions between the controlling shareholder and the listed company. This is manifested in the following aspects:

First, the shareholding structure of listed companies is unreasonable, and the phenomenon of "one-dominated shares" in state-owned shares is quite common. In addition, both state-owned shares and legal person shares are non-tradable shares, resulting in an excessively large proportion of non-tradable equity, which has caused a large amount of state-owned assets to settle. At the same time, the consolidation of the exercise of state-owned stock rights makes it difficult to change the allocation of state-owned property rights, which violates the principle of "same shares and same rights." The main ways of exercising equity are nothing more than two ways: one is to directly intervene in the company and participate in the operation; the other is to sell shares in the stock market and "vote with your feet" to influence the company's decision-making and operation from the outside. For the controlling shareholders of listed companies, the non-tradability of state-owned shares has largely prevented them from obtaining the same income opportunities as public shareholders. Therefore, the way these controlling shareholders exercise equity is mainly concentrated on intervention and intervention in the affairs of listed companies, and gains through unfair related party transactions.

Second, the governance structure of listed companies is very imperfect. The shareholders' meetings are actually controlled by the major shareholders.

Usually includes the following:

(1) Buying or selling goods.

(2) Other than buying or selling goods

Because intra-group related party transactions are less risky than non-related party transactions, related party contracts often do not pay attention to details and are too simple. Although they are legally compliant, they do not meet the requirements of China's taxation bureau. For example, the content of the contract states that the service item is "services generally provided to group member companies within the group". Such expressions will be considered by the tax bureau as lack of substance in the contract, leading to high taxes, or requiring additional information and greatly delayed payment. time. Linked-F emphasizes that the contract is the main basis for determining the authenticity of the service, an important reference for the tax authority to determine the tax liability, and also the information for the foreign exchange administration and the bank to review the foreign exchange payment, and enterprises should pay attention to it. At present, the tax authorities mainly examine the elements of non-trade payment contracts: the subject matter of the contract, the duration of the contract, the place and method of performance, the amount of the contract and the method of charging, whether the contract amount includes taxes and the ownership of intellectual property rights. ^[1]

Related parties: If one party controls, jointly controls or exerts significant influence on the other party, and two or more parties are under the control, joint control or significant influence of one party, they constitute related parties.

Control refers to the right to determine the financial and operating policies of an enterprise and to obtain benefits from the operating activities of the enterprise.

Joint control refers to the common control of an economic activity in accordance with the contract, and it exists only when the important financial and operating decisions related to the economic activity require the unanimous consent of the investors who share control.

Significant influence refers to the power to participate in the decision-making of an enterprise's financial and operating policies, but not to control or jointly control the formulation of these policies with other parties.

Affiliated companies

(1) The parent company of the enterprise.

(2) Subsidiaries of the enterprise.

(3) other enterprises controlled by the same parent company as the enterprise.

(4) Investors who exercise joint control over the enterprise.

(5) Investors who have significant influence on the enterprise.

(6) Joint ventures of the enterprise.

(7) Associates of the enterprise.

(8) Individuals of the main investors of the enterprise and family members closely related to them. An individual major investor is an individual investor who can control or jointly control an enterprise or exert significant influence on an enterprise.

(9) The key management personnel of the enterprise or its parent company and family members closely related to it. Key management personnel are those who have the power and are responsible for planning, directing, and controlling corporate activities. A family member who has a close relationship with a major investor individual or key management personnel refers to a family member who may affect or be affected by the individual when processing transactions with the enterprise.

(10) Other enterprises controlled, jointly controlled or exerted significant influence by individuals, key management personnel or close family members of the company's major investors.

Non-affiliated companies

(1) Providers of funds, utilities, government departments and institutions that have daily transactions with the enterprise.

(2) A single customer, supplier, franchisor, dealer, or agent who has a large number of transactions with the enterprise and has an economic dependency relationship.

(3) Joint venturers who jointly control the joint venture with the enterprise.

(4) An enterprise that is only under the control of the state and has no other related party relationships does not constitute a related party.

(5) Enterprises that are significantly affected by the same party do not constitute related parties.

Related party transactions

Related party transactions refer to the transfer of resources, services or obligations between related parties, regardless of whether or not the price is charged.