Adjustment and Improvement of Tax Policies for the Merger and Restructuring of Enterprises

By Lun Wang, ECOVIS Ruide China

The State Council promulgated the Opinions on Further Optimizing the Market Environment for the Merger and Restructuring of Enterprises (Guo Fa[2014] No.14) on March 24, 2014. With regard to the merger and restructuring of enterprises, tax policies shall be implemented and improved, which mainly include to revise and perfect policies on special tax treatment of enterprise income tax that apply to enterprise merger and restructuring, lower the limits on the proportion that acquired shares (or assets) account for the total shares (or assets) in the target enterprise, improve enterprise income tax policies that apply to non-monetary assets investment transactions. Accordingly, in December 2014 the State Administration of Taxation and Ministry of Finance promulgated 2 supportive documents which date back to January 1, 2014 to take effect. The main points are hereby notified as follows:

a) On December 25, 2014 the State Administration of Taxation and Ministry of Finance promulgated the Opinions on Issues concerning the Enterprise Income Tax Treatment for the Promotion of Enterprise Restructurings (Cai Shui [2014] No. 109).
b) On December 31, 2014 State Administration of Taxation and Ministry of Finance promulgated the Opinions on the Policy Issues concerning Enterprise Income Tax for Non-Monetary Assets Investments (Cai Shui [2014] No. 116).
These 2 documents are mainly the important supplement and further improvement of the Opinion on Issues Concerning Treatment of Enterprise Income Tax in Enterprise Restructuring Business (Cai Shui [2009] No. 59). The followings are the brief of these two documents:

Cai Shui [2014] No. 109

This document is mainly a partial revision of Cao Shui [2009] No. 59:

(1) Refer to share-deal: According to No. 59, share-deal applicable to special tax treatment stipulates the proportion that the shares purchased by the acquiring enterprise account for the total shares of the acquired enterprise should not lower than 75%, now change to 50%;
(2) Refer to assets-deal: According to No. 59, assets-deal applicable to special tax treatment stipulates the proportion that the assets acquired by the receiving enterprise account for the total assets of the transferring enterprise should not lower than 75%, now change to 50%;
(3) Share or assets transfer between the resident enterprises under 100% direct control in the same group: No. 59 does not stipulate the tax treatment of share or assets transfer at net book value between the resident enterprises under 100% direct control in the same group. No. 109 stipulates explicitly in this case the enterprise could apply to special tax treatment from January 1, 2014 and both parties shall not recognize the income.

Cai Shui [2014] No. 116

This document promotes the policy of the Deferred Tax Payment for Non-Monetary Assets Investments implemented formerly in Shanghai Free Trade Zone throughout the country, and explicitly stipulates that the income from transfer of assets gained by a resident enterprise that makes outbound investment of non-monetary assets should adopt the policy of deferred tax payment (non-monetary assets contributions to the establishment of new resident enterprises or non-monetary assets injections into existing resident enterprises). The key points of the policy of deferred tax payment include:

(1) The evaluation of non-monetary assets investment. An resident enterprise that makes outbound investment of non-monetary assets shall evaluate the non-monetary assets and calculate and recognize the income from transfer of non-monetary assets based on the balance of the fair value as evaluated after deduction of the tax basis, and recognize the income from the transfer of non-monetary assets when the investment agreement takes effect and the equity registration formalities are gone through.

The term “non-monetary assets” refers to the assets other than such monetary assets as cash, bank deposit, accounts receivable, notes receivable and bond investment ready to be held to maturity.

(2) The income from transfer of non-monetary assets may be included in the taxable income of the corresponding year by equal installments within five years, and the enterprise income tax shall be calculated and paid in accordance with the provisions.

(3) The tax basis for the equity acquired from the enterprise invested in by an enterprise through outbound investment of non-monetary assets shall be adjusted year by year based on the former tax costs of the non-monetary assets, plus the income from the transfer of non-monetary assets recognized yearly. That is to say, the tax basis of shares is calculated step by step according to the progress of tax paid.
The tax basis for the non-monetary assets acquired by the enterprise invested in shall be determined at fair value of the non-monetary assets.

When an enterprise transfers the equity, recoup its investment and cancels its outbound investment in advance within 5 years, the enterprise income tax should be paid in a lump sum.

Our observations and suggestions

The above 2 documents lower the threshold of the special tax treatment, which is not only good for the enterprise to strengthen resources integration and enhance competitiveness, but also is advantageous to the new normal enterprises merger and restructuring.