Tax relief for financial institutions in disposal of non-performing asset claims

By Wang Zhenxiang, Jingtian & Gongcheng
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On 30 September 2022, the Ministry of Finance (MOF) and the State Taxation Administration (STA) issued the announcement No. 31 of 2022, which provides for VAT, stamp duty, deed tax, real property tax and urban land use tax when offsetting non-performing asset claims in kind by financial institutions, including both banking financial institutions and financial asset management companies.

ANNOUNCEMENT NO. 31

The announcement makes the following revisions to the tax rates and exemptions of the above-mentioned taxes:

Wang Zhenxiang, Jingtian & Gongcheng
Wang Zhenxiang
Partner
Jingtian & Gongcheng

(1) stamp duty on contracts, title transfer instruments and business books during the takeover and disposal of foreclosed assets by financial institutions is exempted, and the deed tax associated with the acceptance of assets is exempted; the regional authorities may reduce or exempt real property tax and urban land use tax on the foreclosed immovable property held by financial institutions as authorised by higher-level laws;
(2) when disposing of immovable property, a financial institution may opt to treat the full price and non-price expenses minus the valuation at the time of acquisition of the foreclosed immovable property as the sales turnover and apply VAT at 9%.

It should be emphasised that the foreclosed assets require a court judgment or ruling or an award from an arbitration institution. Where a financial asset management company wishes to apply announcement No. 31 to offset debt, the claims must come from a banking financial institution. Announcement No. 31 will be implemented from 1 August 2022 to 31 July 2023, and taxes collected and turned over to the treasury before the announcement date may be offset against taxes payable by the taxpayer in the subsequent few months or for a tax refund. Once a dedicated VAT invoice has been recovered, announcement No. 31 may be applied.

REGIONAL POLICIES

The 2016 Policy Guidelines for VAT on the Financial Sector of the Beijing Municipal Office of the STA provides that the input VAT on immovable property or immovable property under construction is deducted from the output VAT within two years from the date of acquisition of the title. The deduction rate is 60% for the first year and 40% for the second year. However, this policy does not apply to a real estate project developed by a real estate developer that is offset against the debt to the institution. Immovable property or immovable property under construction are considered fixed assets under the accounting system, if acquired by approved institutions after 1 May 2016. These institutions require the approval of the People’s Bank of China, the China Banking and Insurance Regulatory Commission and the China Securities and Regulatory Commission to engage in financial or insurance business.

Applying article 5 of the Notice on Continuing to Support the Restructuring and Restructuring of Enterprises and Public Institutions on Deed Tax Policies, issued by the STA and the MOF in 2018, the governments of Zhejiang and Chongqing expressly announced creditors (including employees of a bankrupt enterprise) who took over the land and premises of the bankrupt enterprise used to offset debts are exempt from deed tax. The “implementation of bankruptcy” expressly includes the bankruptcy liquidation procedure provided in the Enterprise Bankruptcy Law. Other than Zhejiang and Chongqing, few regions have adopted this practice.

Quanzhou in Fujian province issued provisional regulations in 2015 to intensify efforts to dispose of non-performing assets. If a commercial bank within the Quanzhou jurisdiction accepts the offsetting of debts in kind, the local fiscal authority will reward the bank for lending, under the current fiscal system, with the local portion of the taxes and levies paid when it acquired the foreclosed assets.

Several regional authorities have issued provisions that allow enterprises with genuine difficulties in paying property tax and urban land use tax to apply for hardship tax relief, as was the case for Hubei in 2022, Zhejiang in 2019, Shanghai in 2020 and Panjin, Liaoning in 2015.

Moreover, Hubei and Shanghai provide that, from the date a court rules to accept a petition for the bankruptcy liquidation of an enterprise to the conclusion of the liquidation, where the premises involved has ceased to be used, it constitutes a circumstance for hardship relief from real property and land taxes. Zhejiang provides that where a taxpayer that has lawfully entered a bankruptcy procedure is genuinely unable to pay taxes, they can enjoy discretionary reduction or exemption from the real property and land taxes incurred during the bankruptcy procedure on the administrator’s application. However, this is not available to taxpayers involved in industries that are restricted or not encouraged by the state.

To avoid ambiguity, for industries restricted or to be eliminated by the state, a list can be found in the most recently published Catalogue for Guiding Adjustment of the Industrial Structure. The various types of land for real estate development exclude the land approved for developing and constructing affordable housing. In Panjin, real property tax and land use tax on real property acquired by financial enterprises to offset debts are exempted temporarily.

Nanping Taxation Bureau Announcement No. 1 of 2021 provides that where older premises and structures of an entity are transferred by way of debt in kind by the people’s court (including the disposal of state-owned land use rights and structures on the land in bankruptcy proceedings), the tax rate under verification collection is 6%.

Where the same are not transferred by auction, sold off, or debt-in-kind by a court or the state-owned land use rights and premises are not disposed of in bankruptcy proceedings, the tax rate under verification collection is subject to a tax burden calculation and is not less than 5%. Similar provisions are found under 2021 announcements issued by the Ningde and Fuzhou tax bureaus, with the two corresponding tax rates set at 7% and not less than 5%.

Wang Zhenxiang is a partner at Jingtian & Gongcheng

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