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Promulgation of China's new tax implementation rules for corporate restructuring
In general, the purposes of companies undergoing corporate restructuring are multiple, namely achieving operational efficiency, raising funding, streamlining corporate structures, enhancing business objectives, etc., and the forms of the corporate restructuring also vary. In the good times, many business expansions take place via corporate restructuring; equally in the economic downturn, corporate restructuring is also commonly used in streamlining operation to improve efficiency.
The China Corporate Income Tax ("CIT") regime has yet to provide a very comprehensive tax rules to address corporate restructuring. The Detailed Implementation Regulations ("DIR") to the China's CIT Law merely stipulates that, where an enterprise undergoes a corporate restructuring, it has to recognize the gain or loss resulting from the transfer of the relevant assets at the time of the restructuring, and the tax basis of the relevant assets shall be revised according to the transaction prices, unless it is otherwise prescribed by the Ministry of Finance ("MoF") and State Administration of Taxation ("SAT").
We reported in the April 2009 Issue 10 of our News Flash about the upcoming set of new tax implementation rules for corporate restructuring and their likely directions. The MoF and SAT finally jointly released the rules for corporate restructuring ("Restructuring Rules") under the Notice entitled "Several Questions about CIT Treatments for Corporate Restructuring" - Caishui [2009] No. 59, on 30 April 2009.
In this Issue, we will summarize the salient points of the Restructuring Rules, and highlight the key features of the Restructuring Rules for our clients to appreciate them and take necessary actions:
Salient points of restructuring rules
- Forms of restructuring covered
- Changes in legal form
- Debt restructuring
- Equity acquisition
- Asset acquisition
- Merger
- Spin-off
- General tax treatments
- Special tax treatments
- Prescribed conditions
- Special tax treatments - tax deferral
- Cross-border corporate restructuring
- Other important features
- Treatment of tax loss and "ring-fencing rule"
- CIT profiles / incentives of merged and spun-off enterprises
- Multiple-step corporate restructuring
- Effective date of the restructuring rules
PwC's observations
- Close to international practice
- Different from the former tax regimes
- Unclear issues
- Administration
- Corporate restructuring completed in 2008
Conclusion
The penultimate provision of the Restructuring Rules allows the CIT matters in a corporate restructuring which are not specifically addressed in the current Rules to be separately regulated by the MOF and SAT. It is an indication of allowing a flexibility for these authorities to come up with further policies to clarify, adjust, supplement or even change the CIT treatments as provided or not provided in the current Rules.
The new Restructuring Rules represent a milestone in the China tax development. We believe such flexibility is necessary as corporate restructuring usually involve relatively complex transactions.
No matter whether companies may have undergone corporate restructuring before the promulgation of the Restructuring Rules and hence need to rectify the tax positions in 2008 annual CIT return filing, or are about to go through a corporate restructuring, they have to stay tune for the developments of these new Restructuring Rules, not only the policies or interpretation from the MOF and SAT, but also the local implementation rules and practice.
In the next few Issues of our News Flash, we will discuss the tax treatments for each type of restructurings in greater detail, and share our observations and insights drawn from these rules. In the meantime, we held a webcast on the Restructuring Rules.
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Read more by downloading our China Tax/Business News Flash (May 2009, Issue 11) (pdf file, 156KB) for your reference.
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