Entities that may carry out a gratuitous transfer of state-owned property rights (SOPR) in an enterprise include government authorities, institutions, wholly state-owned enterprises, wholly state-owned companies, and enterprises in which the state-owned asset commission at various levels performs the duty of investor and their subsidiaries.
It should be particularly noted that not all enterprises in which the state has made a capital contribution may carry out property rights gratuitous transfers. Only wholly state-owned enterprises, wholly state-owned companies, and state exclusively-invested enterprises are permitted to do so, with state-owned capital holding companies and companies in which state-owned capital has an equity interest being the exceptions.
Legal procedures and operation
Chapter 2 of the Administrative Measures specifies the legal procedures for the transfer without consideration of SOPR. More specifically, the following legal procedures are involved, and the same generally need to be performed in the following steps:
(1) Parties to the transfer conduct a feasibility study and prepare a feasibility report;
(2) Internal approvals of the parties to the transfer. The parties, based on their feasibility study, deliberate on the transfer matters in accordance with their internal decision-making procedures and produce written resolutions;
(3) External approvals. The specific approval procedures are determined based on the nature and level of the investor, and the property rights ownership relationship between the parties to the transfer;
(4) Notification of the creditors of the enterprise (entity) in question on the matters relating to the gratuitous transfer, and formulation of the corresponding debt disposal plan by the transferor;
(5) The enterprise from which property rights are to be transferred conducts an audit, or asset and capital verification, in accordance with relevant regulations, with the outcome serving as the basis for the transfer;
(6) Parties to the transfer execute an agreement for the gratuitous transfer; and
(7) Carrying out of the gratuitous transfer. The parties to the transfer carry out an account adjustment in accordance with the relevant official reply document and transfer agreement, and carry out the property rights registration procedures in accordance with regulations.
As such a transfer remains in essence an asset transaction, the issue of whether relevant taxes are payable will usually be faced. However, such transfer involves a relatively complicated situation, and current laws and regulations relating to such transfer are silent on this issue. Accordingly, this article discusses and analyzes the tax treatment that may be involved from the perspective of the types of tax that could be involved.
Value-added tax. If a gratuitous transfer of state-owned assets in an enterprise satisfies the circumstance that labour, claims and liabilities are transferred along with the assets as described by the State Administration of Taxation (SAT) in Announcement No. 13 of 2011, then Announcement on Value-Added Tax Issues Relevant to Asset Restructurings of Taxpayers, and Announcement No. 66 of 2013 may be included in the scope of circumstances where value-added tax is not levied. On the other hand, there is still a possibility that such a transfer could be deemed a sale, and thus require the payment of value-added tax.
Enterprise income tax. The preferential policy of exemption from enterprise income tax may be available if a gratuitous transfer of SOPR satisfies the following four conditions: (1) having a reasonable commercial objective; (2) the main objective not being to reduce, exempt or delay payment of taxes; (3) not changing the original substantive business activities involving the transferred equity or assets for 12 months following the equity or asset transfer; and (4) neither party to the transfer recognises any gain or loss for accounting purposes.
Stamp tax. There are two such main items in a gratuitous transfer of SOPR, namely, the property rights transfer instrument and the capital account, and the relevant stamp tax is usually paid based on the net book value of the SOPR on the transferor’s transfer reference date.
Land value-added tax. The Notice on Continuing Implementation of Land Value-Added Tax Policies Relating to Changes in Corporate Form and Restructurings of Enterprises, issued by the Ministry of Finance and the SAT in 2018, specifies that where an enterprise carries out a change in corporate form, merger, division or restructuring, and certain specific circumstances are met, the policy of not levying land value-added tax for the time being may be applied, provided that neither of the parties is a real estate developer.
Deed tax. Where a real estate transfer involved in a transfer of SOPR satisfies article 6 of the Notice on Deed Tax Policies Relevant to Continuing to Support the Change in Corporate Form and Restructuring of Enterprises and Institutions, the payment of deed tax is not required.
Main content of a lawyer’s legal opinion on these matters. When a lawyer issues a legal opinion on the lawfulness and compliance of a transfer of SOPR in an enterprise, such opinion should normally include the following:
(1) Entity qualifications of the parties to the transfer. The lawyer needs to review the public information in the national enterprise information disclosure system, and the articles of association of the parties to the transfer, to verify the nature, existence, equity structure, etc., of the parties, to confirm whether they are entities qualified to carry out a transfer of SOPR in an enterprise;
(2) Analysis of assets to be transferred. The lawyer needs to verify the basic information on, and the information on title to lease of, rights restrictions pertaining to, etc., the assets to be transferred, to confirm whether there are defects in the assets that would make the transfer impossible;
(3) Overview of the plan for the gratuitous transfer, analysis of the lawfulness of the plan, and whether the plan for the disposal of claims and debts, employee resettlement plan, asset transfer agreement, etc., relating to the assets to be transferred are lawful;
(4) Whether the internal and external approvals involved in the asset transfer have been completed; and
(5) Reminders and advice on the relevant tax treatment and amendment of business registration involved, once the asset gratuitous transfer is completed.
Xie Xin is a partner and Huang Tuo is an associate at ETR Law Firm
10 & 29/F, Chow Tai Fook Finance Centre
No.6 Zhujiang Dong Road, Tianhe District
Guangzhou 510623, China
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