With the completion of the restructuring and listing of the five large state-owned banks, the non-performing financial assets that arose before their restructuring were acquired by the four large state-owned financial asset management companies, thereby removing them from the state-owned banks. After acquiring the non-performing assets, the state-owned financial asset management companies disposed of them through such means as debt for equity swaps, establishment of joint venture companies, asset securitization and bundling and selling overseas. The series of policy revisions effected in respect of non-performing financial assets by the National Development and Reform Commission, State Administration of Foreign Exchange (SAFE) and Supreme People’s Court from 2007 to the present will have an impact on the transaction models whereby foreign investors acquire non-performing financial assets in future.
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Concord & Partners
Transfers to foreign parties
Foreign investors are required to carry out recordal in accordance with the National Development and Reform Commission and the State Administration of Foreign Exchange on Regulating the Administration of the Recordal of the Transfer by Domestic Financial Institutions of Non-performing Assets to Foreign Parties Notice and the State Administration of Foreign Exchange on Exchange Control Issues Relevant to the Use by Financial Asset Management Companies of Foreign Funds to Dispose of Non-Performing Assets Notice.
Furthermore, on 25 March 2011, the SAFE issued the State Administration of Foreign Exchange on Issues Relevant to the Administration of the Recordal of Security Provided in Connection with the Transfer of Non-Performing Assets by Financial Asset Management Companies Notice (Hui Fa [2011] No. 13), which specifies that under such transactions the security provided by domestic guarantors to foreign investors for domestic debtors in connection with transfers of claims does not fall under the administration of security provided to foreign parties.
However, Hui Fa No. 13 additionally emphasizes that foreign investors, when carrying out the recordal of the transfer of non-performing assets to foreign parties, are required to provide a detailed list of each item of security. If a foreign investor seeks judicial recourse against the relevant guarantor after the acquisition of a claim, it can avoid the legal risk of the security being invalid, provided that the recordal it carried out is sound in form.
Tax treatment
Pursuant to the State Administration of Taxation on the Issue of Tax on the Financial Asset Disposal Business Engaged in by Foreign-Invested Enterprises and Foreign Enterprises Notice, when an investor disposes of non-performing bank assets, it is not required to pay business tax on the sale or transfer of equity, but it is required, in accordance with the value-added tax regulations and other regulations, to pay value-added tax on the revenue it derives from the disposal of physical assets that it owns and to pay business tax on the transfer of immovables or land use rights. Furthermore, when it sells or transfers claims or converts such claims into equity, it is not required to pay either business tax or value added tax.
With respect to enterprise income tax, an investor is required to calculate and pay enterprise income tax on the net returns on the revenue derived from the disposal of non-performing assets after the deduction of the original price of, expenses relating to, and losses on, the assets. A foreign enterprise that does not have an establishment in the PRC is required to file and pay the taxes or entrust its agent in the PRC to do so on its behalf.
The enterprise income tax may be paid in the place where an enterprise whose assets it disposed of is located. The place of payment of the business tax or value-added tax is determined in accordance with relevant regulations.
Judicial disposal
After acquiring non-performing bank assets, an investor will generally dispose of them by way of a settlement, claim-debt restructuring, further transfer of the non-performing assets, judicial recourse, etc. With respect to the judicial disposal of non-performing assets, the Supreme People’s Court has issued a series of regulations, notices and responses. However, as the courts in different places had, in the course of the acceptance, trial and enforcement of such cases, demonstrated different understandings, the Supreme People’s Court issued the Conference on the Trial of Cases Involving the Transfer of Non-performing Financial Loans Minutes on 30 March 2009.
The Supreme People’s Court’s conference minutes emphasize that when a state-owned financial asset management company wishes to transfer non-performing assets to a third party, the relevant local government or the agency or authority performing the duties of investor on behalf of the government at the same level or the group company that holds the state-owned capital of the state-owned enterprise debtor has a right of first refusal over the non-performing assets that are the subject of the transfer.
Regarding changes in the litigating parties and enforcing parties in a non-performing assets case, although the Contract Law provides for the entities in claim transfers, the Civil Procedure Law is silent on the procedure for changing parties in the course of the trial and enforcement of a civil case. Although the Supreme People’s Court has issued regulations on the trial and enforcement of cases involving the transfer of non-performing assets to third parties and further clarified them in the conference minutes, as there are some doubts as to the validity of such regulations, the enforcement efforts by courts in various places differ.
The Supreme People’s Court has specified that existing regulations do not apply when a transferee, after acquiring non-performing assets, further transfers them to another party. These regulations include the Supreme People’s Court on Several Issues Concerning the Application of the Law in the Trial of Cases Involving the Acquisition, Management and Disposal by Financial Asset Management Companies of Assets Arising from the Non-Performing Loans of State-Owned Banks Regulations, the Supreme People’s Court to the Letter on Questions Relevant to Thoroughly Implementing “12 Judicial Interpretations” of the Supreme People’s Court Reply, the Supreme People’s Court on Issues Relevant to the Acquisition, Management and Disposal by Financial Asset Management Companies of Non-Performing Bank Assets Supplementary Notice and the Supreme People’s Court on the Payment of Court Costs in Cases Involving the Disposal of Non-Performing Assets of State-Owned Commercial Banks by State-Owned Financial Asset Management Companies Notice. However, it also specifies “except where the transferee is the relevant local government or the agency or authority performing the duties of investor on behalf of the government at the same level or the group company that holds the state-owned capital of the state-owned enterprise debtor”.
Leo Wang is a partner of Concord & Partners
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