With the development of capital markets, restructuring has become one of the main ways that enterprises open financing channels, integrate resources and optimize their asset allocations. To meet corporate restructuring needs and further optimize the market environment, the Ministry of Finance, the State Administration of Taxation and other government authorities have rolled out various tax break policies (see the table). Of them, the income tax breaks in particular create a good tax policy environment for enterprises, with the effect particularly manifest in restructurings involving non-monetary payments.
Depending on the circumstances, either general tax treatment provisions or special tax treatment provisions apply to enterprise income tax in the course of corporate restructurings. Under general tax treatment, enterprise income tax is payable at the time the restructuring transaction occurs. In contrast, under special tax treatment, the parties to a qualified restructuring transaction provisionally do not recognize the income from or loss on the equity payment portion of their transaction, thereby postponing the payment of enterprise income tax.
Pursuant to Document No. 59 and 109 in the table, for special tax treatment to apply to a domestic restructuring, the following conditions must be satisfied: (1) there being a reasonable commercial objective, and the main objective not being to reduce, exempt or defer payment of tax; (2) the equity and/or assets purchased by the acquiring enterprise not being less than 50 percent of all of the equity and/or assets of the acquired enterprise; (3) no change in the original substantive operating activities of the assets involved in the restructuring during the first 12 months after the corporate restructuring; (4) the equity payment amount forming part of the consideration for the restructuring transaction complying with the percentage specified in the above mentioned documents; and (5) the original major shareholders that received payment in equity in the restructuring transaction not transferring such equity during the first 12 months after the restructuring.
INCOME TAX BREAKS APPLICABLE TO CORPORATE RESTRUCTURINGS
Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Enterprise Income Tax Treatment of Corporate Restructurings (Cai Shui  No. 59)
Official Reply of the State Administration of Taxation on the Issue of the Enterprise Income Tax Treatment of Income Derived from Debt Restructurings (Guo Shui Han  No. 1)
Announcement Concerning the Issuance of the Administrative Measures for Enterprise Income Tax in Connection With Corporate Restructurings (Announcement No. 4 of 2010 of the State Administration of Taxation; partially repealed with the issuance of Document No. 48 of 2015)
Notice of the Ministry of Finance and the State Administration of Taxation on the Issue of Enterprise Income Tax Treatment to Promote Corporate Restructurings (Cai Shui  No. 109)
Notice of the Ministry of Finance and the State Administration of Taxation on Enterprise Income Tax Policy Issues Relating to Investments Made with Non-Monetary Assets (Cai Shui  No. 116)
Announcement on Issues Relevant to the Levy of Enterprise Income Tax in Connection with Investments Made with Non-Monetary Assets (Announcement No. 33 of 2015 of the State Administration of Taxation)
Announcement on Issues Relevant to the Levy of Enterprise Income Tax in Connection with Asset (Equity) Transfers (Announcement No. 40 of 2015 of the State Administration of Taxation)
Announcement on Several Issues Concerning the Levy and Administration of Enterprise Income Tax in Connection with Corporate Restructuring Matters (Announcement No. 48 of 2015 of the State Administration of Taxation)
For special tax treatment to apply to a cross-border (including Hong Kong, Macau and Taiwan) restructuring, any of the following four additional conditions must be satisfied in addition to the five above: (1) where a non-resident enterprise transfers equity of a resident enterprise held by it to another non-resident enterprise 100 percent directly controlled by it, no change on the withholding tax on the income from the equity transfer occurring in future as a result thereof, and the transferor non-resident enterprise undertaking in writing to the competent tax authority that it will not transfer the equity of the transferee non-resident enterprise held by it for three years; (2) a non-resident enterprise transferring the equity in another resident enterprise held by it to a resident enterprise with which it has a 100 percent direct control relationship; (3) a resident enterprise investing in a non-resident enterprise 100 percent directly controlled by it assets or equity held by it; or (4) another circumstance approved by the Ministry of Finance and the State Administration of Taxation.
Special tax treatment of corporate restructurings. In the domestic debt restructuring of an enterprise, if the taxable income recognized for such a restructuring accounts for at least 50 percent of the enterprise’s taxable income for the year in question, it can, for five tax years, be counted as part of its taxable income equally for each of those years.
In the domestic non-monetary asset restructuring of an enterprise, the income derived from the non-monetary asset transfer recognized for the investment of such assets in a third party can, for not more than five tax years, be counted as part of the taxable income equally for each of the corresponding years, retroactive to 1 January 2014. The term “non-monetary assets” here means such assets as cash, bank deposits, accounts receivable, bills receivable and bond investments that are to be held until maturity.
If the enterprise transfers the equity or recovers its investment, or is deregistered during the five years after the investment in the third party, implementation of the deferred tax payment policy is to cease and enterprise income tax is to be paid in one lump sum on the income from the transfer of the non-monetary assets that has yet to be recognized for the deferral period.
In the cross-border restructuring of an enterprise, where a resident enterprise invests in a non-resident enterprise with whom it has a 100 percent direct control relationship assets or equity that it holds and opts for special tax treatment for the returns on the transfer of its assets or equity, it can, for 10 tax years, count the same as part of its taxable income equally for each of those years.
Cao Yiran is a partner and Wang Penghe is a trainee at Grandway Law Offices
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