On 26 July, the State Administration of Taxation published the Corporate Income Tax on Business Restructuring by Enterprises Administrative Measures (State Administration of Taxation Announcement No. 4 of 2010) (the Measures), which elaborate on some principles and clarify some unclear clauses in the Several Issues Regarding the Handling of Corporate Income Tax on Business Restructuring by Enterprises Notice (Cai Shui [2009] No. 59) (Document 59) published by the Ministry of Finance and the State Administration of Taxation, and clarify tax-related reporting procedures and requirements for the preparation of material to be submitted.
Retrospective effect
The Measures have retrospective effect in three respects: (a) they are retroactive to 1 January 2010; (b) they apply to business restructuring that has been completed by enterprises at the time of publishing the Measures. For example, Document 59 is applicable to special tax treatment. However, if an enterprise has not prepared relevant information as required by the Measures, it should provide it separately; if such information needs to be confirmed by the tax authorities, it should be confirmed separately as required in the Measures; and (c) enterprises that have not carried out tax management for their business restructuring for years 2008 and 2009 may carry this out according to the Measures. This suggests that enterprises which carried out their business restructuring after 2008 are required to review whether their tax management is in compliance with rules as required by the Measures.
Refining provisions
Various areas are defined and refined in the Measures, such as the parties involved in business restructuring, the dominant parties involved in corporate restructuring, the substantial operating assets of an enterprise, the year for completion of business restructuring, the merger of enterprises under common control, transactions that continue over to the next year, continuation of preferential tax policies and application of consistent tax treatment principles to the same restructuring. These clarifications have made the relevant policies in Document 59 clearer and more practical. In particular, the Measures contain the following provisions related to special tax treatment.
Requirements
Industry has been raising a number of questions about the five requirements in Document 59 for applying for special tax treatment. Some of the ambiguous areas in the document are explained in the Measures, as follows.
- “Reasonable business purposes”: Document 59 requires that an enterprise which applies for special tax treatment must have a “reasonable business purpose”, but fails to explain what a reasonable business purpose is. The Measures say enterprises should elaborate on their reasonable business purposes in the following six respects: the type of transaction used in the restructuring; the form and substance of such transaction; the potential changes brought by the restructuring activities to the tax status of the parties to the transaction; changes in the financial position of the parties to the restructuring as a result of the transaction; whether restructuring activities have caused exceptional economic benefits or potential obligations to the parties to the transaction which would not be created under normal market principles; and details of the participation of non-resident enterprises in restructuring activities. These provide guidelines for enterprises to describe their reasonable business purposes and for government agencies to make a judgment.
- The calculation of 12 consecutive months: Document 59 requires enterprises that apply for special tax treatment not to change the original substantive business activities of the restructured assets within 12 consecutive months after restructuring. The Measures set forth the specific method for the calculation of 12 consecutive months, i.e. they are 12 consecutive months commencing from the date of restructuring. The Measures also specify the dates relating to various types of corporate restructuring: the date of restructuring is the effective date of a restructuring contract for debt restructuring; it is the settlement date of equity or assets for the acquisition of such equity or assets; and it is the date of change in industrial and commercial registration for business merger or separation.
- “Former substantial shareholder”: Document 59 requires that where an enterprise applies for special tax treatment, a former substantial shareholder that receives payment for its shareholding may not transfer such shares within 12 consecutive months of restructuring. In the Measures, a former substantial shareholder is defined as a shareholder who formerly held more than 20% of the shareholding of a transferred or acquired enterprise.
Application process
The Measures set out two application processes and details of the special tax treatment for corporate restructuring that meets the specified requirements. Firstly, in accordance with the requirements of Document 59, the parties should submit filing information in writing to the competent tax authorities when annual corporate income tax is declared in the year of the business restructuring. Secondly, the Measures allow enterprises to apply for confirmation. In such a case, the main parties involved in the restructuring apply to the competent tax authorities, and report to the provincial tax authorities for confirmation.
If changes occur in production and operation, the type of company, the assets or the ownership structure of one of the parties within a prescribed time limit, resulting in the business restructuring no longer meeting the requirements for special tax treatment, the tax treatment for business restructuring should be revised in accordance with the general stipulations of Document 59.
Preparation of material
The Measures elaborate at length on the requirements for preparing various material for different types of business restructuring described in Document 59. More requirements are set down for preparing material for special tax treatment than general tax treatment, such as preparation of material which substantiates that a restructuring transaction has a “reasonable business purpose”, and that the restructuring meets the requirement for special tax treatment. For cross-border restructuring involving non-resident enterprises as the dominant parties to the restructuring, and special tax treatment that applies to the business restructuring in the following two cases: (a) a non-resident enterprise transfers its equity in a resident enterprise to another non-resident enterprise in which it holds a 100% direct controlling shareholding; and (b) a non-resident enterprise transfers its equity in a resident enterprise to another resident enterprise in which it holds a 100% direct controlling shareholding, the Measures specify that relevant material must be prepared in accordance with the requirements of the State Administration of Taxation Notice on the Issuance of “Tentative Measures Governing the Withholding of Income Tax at Source of Non-resident Enterprises” (Guo Shui Fa [2009] No. 3) and the State Administration of Taxation Notice on Strengthening the Management of Corporate Income Tax on the Proceeds from Equity Transfers by Non-resident Enterprises (Guo Shui Han [2009] No. 698).
It is anticipated that there will be more business restructuring carried out by enterprises following the recent release of the State Council Promotion of Mergers and Restructuring Opinion. The Measures help clarify the relevant tax costs of market players involved in corporate restructuring, and this should encourage more enterprises to carry out business restructuring.
Business Law Digest is compiled with the assistance of Haiwen & Partners. The authors can be emailed at baochen@haiwen-law.com. Readers should not act on this information without seeking professional legal advice.
