Significant improvement on the corporate income tax treatments for restructuring transactions

In March 2014, the State Council issued a circular, Guofa [2014] No.14 (Circular 14)1, urging various government bodies to improve their policies so as to encourage mergers and acquisitions (M&A) in China. In response to Circular 14, the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) recently released two new circulars Caishui [2014] No.109 (Circular 109) and Caishui [2014] No.116 (Circular 116) to substantially improve the corporate income tax (CIT) restructuring rules.


Under China's CIT Law, companies undergoing corporate restructuring2 have to recognize the gain/loss from the transfer of relevant assets or equity at fair value when the transaction takes place (i.e. the general tax treatment or GIT). If the transaction satisfies the following criteria under the corporate restructuring rules stipulated under circular Caishui [2009] No.59 (Circular 59), the transferor and transferee may elect to opt for special tax treatment (STT), which is effectively a tax deferral treatment upon the completion of the necessary record-filing procedures:

  • The transaction is conducted for reasonable commercial reasons, not for tax purposes;
  • The equity or assets being acquired must reach a certain prescribed ratio for the tax authorities to consider the corporate restructuring as sufficiently material for STT purposes. In particular, in an equity deal, the equity acquired should be at least 75% of the total equity of the target company; whereas in an assets deal, the assets acquired should be at least 75% of the total assets of the transferor company;
  • There is no change in the original operating activities within a prescribed period of time after the restructuring;
  • Equity has to comprise at least 85% of the total consideration. In other words, non-equity consideration should not exceed 15% of the total consideration; and
  • The equity consideration received shall not be transferred within a prescribed period of time.

Reduction of the minimum threshold from 75% to 50% (i.e. the 2nd SIT criterion)

Circular 109 has substantially reduced the minimum threshold in the 2nd SIT criterion for both equity and assets deals from 75% to 5o%. It would be much easier for companies to enjoy STT in light of this new change.

Deferral tax treatment for domestic intra-group restructuring transactions

Circular 109 also sets out a new type of tax deferral treatment for domestic intra-group equity and assets "assignment" between Chinese TREs if all of the following conditions are satisfied:

The transferor and transferee have one of the following investment relationships:

  • the transferor and the transferee have a 100% direct investment holding relationship; or
    the transferor and the transferee are 100% owned by the same TRE shareholder or the same group of TRE shareholders.

  • The "assignment" is effected at net book value (NBV);

  • Neither the transferor nor the transferee has recognised profit/loss for accounting purpose;

  • The transaction is conducted for reasonable commercial reasons, not for tax purposes (same as the 1st SIT criterion under Circular 59); and

  • There is no change in the original operating activities within 12 months after the transaction (similar to the 3rd SIT criterion under Circular 59).

If a domestic intra-group equity/assets "assignment" satisfies all the above conditions, neither the transferor nor transferee need to recognize any income derived from the transfer. The tax basis of the assets/equity received by the transferee shall be determined based on the original NBV (instead of the original tax basis) in the hands of the transferor.

Deferral tax treatment for equity investment with non-monetary assets

According to Circular 116, gains derived by a TRE from the asset appreciation arising from the use of non-monetary assets to invest in the equity of another TRE may be amortized over a period of up to five years and consequently the relevant CIT paid in instalments.

This indicates that the trial run of the same deferral tax treatment in the Shanghai Pilot Free Trade Zone has been replicated all over the country.