The tax accounting training courses offered by the People’s University of China was opened on August 25, 2012. Mr Liu Tianyong was invited to give a talk to lawyers & attorneys nationwide on tax involvement and planning in M&A. The talk covers potential tax related risks in M&A transactions and possible solutions to prevent or minimize such problems. Particularly, it covers the following six topics:
(1) Six types of M&A
(2) Principles used in tackling tax issues in M&A transactions
(3) The six types of tax treatment granted to M&A
(4) Special tax treatments in cross-border corporate/business restructurings
(5) Risks in M&A: indirect equity transfer
(6) The typical cases analysis
Administrative Measures of Enterprise Income Tax Derived from Enterprise Restructuring Business (the Measures) was issued on 26 July 2010 and with retrospective effect from 1 January 2010. For Enterprises which complied with special tax treatment of Notice of the Ministry of Finance and SAT on Issues of Enterprise Income Tax Treatment on Enterprise Restructuring Business,(the Notice, Caishui No. 59,2009) and have already completed restructuring business, if have not prepared relevant materials according to the Measures, they should supplement relevant materials; if confirmation of tax authority was required, supplementing confirmation should be conducted in conformity to the Measures. For taxes derived from enterprise restructuring business which have not been dealt with, should be disposed in conformity with the Measures.
Some contents of the Measures:
- Determination of Parties in Restructuring Business: Parties of debt restructure refer to debtor and creditor; parties of stock acquisition refer to acquirer, assigner and target company; parties of assets acquisition refer to assigner and acquirer; parties of merger refer to merger company, merged company and shareholders of the both; parties of enterprise split refer to split company, companies after split and shareholders of the both.
- Substantive Operating Assets, refer to assets used in production and business activities which are directly related to business incomes; including all sorts of business assets, business information and technique owned by the company, receivables derived from business activities and d investment assets.
- Determination of Restructuring Date: Debt restructure date shall be the day when debt restructuring contract or agreement comes into force; restructure date of stock acquisition date shall be the day when transfer agreement has come into force and formality of equity alteration is completed; restructure date of assets acquisition shall be the day when transfer agreement has come into force and assets are actually took over; restructure date of enterprise merger shall be the day when merger company acquires ownership of merged companies’ assets and completes alteration of I&C registration; restructuring date of enterprise split shall be the day when companies after split acquire ownership of split company’s assets and complete alteration of I&C registration.
Common Tax Treatment Management of Enterprise Restructuring
- For legal person who transforms into sole individual proprietorship enterprise, partnership enterprise or other unincorporated organization, or who transfers its registration place outside China (including Hong Kong, Macau and Taiwan), it should conduct liquidation according to Notice of the Ministry of Finance and SAT on Issues of Enterprise Income Tax Treatment on Enterprise Liquidation Business, Caishui No. 60 (2009). For other restructuring business complied with common tax treatment ( e.g. stock acquisition, assets acquisition, etc), the company should prepare materials for examination from tax authority, which should include agreements of debt restructuring or stock/assets acquisition, and legitimate proof of stock/assets’ proper value.
- For enterprise merger or split, if merger parties or split enterprises are concerned with enjoying transitional tax preferential policies before expiration on whole enterprise ( all production and operation incomes) in Article 57 of EIT Law, only about remnant preferences shall Article 9 of the Notice be applied; unexpired tax preferences of nullified merged or split enterprises can not be succeeded by succession enterprises; newly established enterprises from merger and split should not succeed or renew above preferences. For enterprises of merger or split parties which are concerned with succession of enjoying tax preferences on enterprise income derived from production and operation, which are stipulated in tax preference provisions of EIT Law or in transitional preferential policies, Article 89 of the Enforcing Regulations shall be applied.
Special Tax Treatment of Enterprise Restructuring
- For enterprises met requirements of the Notice, If they choose special tax treatment, should conduct recordation according to Article 11 of the Notice; If parties of enterprise restructuring need confirmation of tax authority, could choose to file application to tax authority by the leading party, and the authority shall submit to provincial tax authority level by level to get confirmation.
Article 22, 23, 24, 25 and 27 of the Measures provide materials need to be prepared specific to special restructuring as debt restructuring, stock acquisition, assets acquisition, merger and split. Materials need to be prepared include (but not limited to) statement of reasonable business purpose, approval documents of authorized department of the government, relevant materials about book value and taxation base, and materials proving that the restructuring meets requirements of special tax treatment (e.g. maintain original substantive business activity of the assets in 12 months, commitment of main original shareholders on not transferring obtained stocks).
- For enterprise enjoying transitional tax preferential policies on whole enterprise ( i.e. all production and operation incomes), if nature of the enterprise after merge or split and requirements of tax preferences have not changed, enterprise after merge or split can continue to enjoy tax preferences of enterprises before merger or split in remnant period.
If remnant tax preference periods of the enterprises before merger are inconsistent, annual amount of taxable incomes of enterprise after merger should be similarly divided according to ratio of enterprise assets before merger in total enterprise assets after merger on merger date, and then calculated following separate remnant preferences. For enterprises before merger or split which are concerned with succession of enjoying tax preferences on enterprise income derived from production and operation, which are stipulated in tax preference provisions of Tax Law or in transitional preferential policies, Article 89 of the Enforcing Regulations shall be applied.
- For special restructuring, the Notice also demand business and interests continuity of transaction parties in 12 months from restructuring (e.g. do not change original substantive business activities in continuous 12 months after merger). And the Measures clarified that above period refers to continuous 12 months calculated from above restructure date.
According to Article 10 of the Notice, for restructuring business concerned with gradual transaction in continuous 12 months, and lasting to the next year, if the parties estimate that the entire business can satisfy requirements of special tax treatment, and reach agreement of choosing special treatment, special tax treatment can be applied after first-step transaction. After examination of relevant materials, tax authority can temporarily approve the special tax treatment if requirements are satisfied. Relevant materials must be prepared according to the Notice for confirmation of special tax treatment after next-step transaction of 2nd year.
For above gradual transaction lasting to the next year, if the parties can not estimate whether the entire transaction will satisfy requirements of special treatment, common tax treatment shall be applied. After whole transaction is completed in the next tax year, if special tax treatment should be applied, annual enterprise income tax return of the 1st year can be adjusted, and concerned over-paid taxes shall be refunded or credited in the 2nd tax year.
Tax Management of Interstate Restructuring
- For restructuring stipulated in Article 7 of the Notice, if comply with provisions of special tax treatment, implementation shall follow relevant contents of Chapter 3.
- For restructuring stipulated in subparagraph 1, 2, Article 7 of the Notice, if comply with special tax treatment, preparation of materials shall follow requirements of Notice of SAT on Printing and Distributing Interim Measures for Administration of Source-based Withholding of Enterprise Income Tax on Non-resident Enterprises and ·Notice of SAT on Strengthening Administration of Enterprise Income Tax on Non-resident Enterprises’ Equity Transfer Income.
Serving the purpose of implementing the Notice of the Ministry of Finance and the State Administration of Taxation on several issues concerning the enterprise income tax treatment on enterprise reorganization (Caishui  No. 59) (Notice for short hereafter), and enhancing the administration of enterprise income tax on enterprise reorganization, SAT issued Administrative measures for enterprise income tax on enterprise reorganization (Measure for short hereafter) on 26th July 2010. The Measure includes four chapters, thirty seven articles. It covers four parts of contents, namely: detailed explanations or definitions of partial expressions and conceptions in No.59 Notice, administration of general tax treatment on enterprise reorganization, administration of special tax treatment on enterprise reorganization, and administration of tax on cross-border reorganization.
The Administrative measures for enterprise income tax on enterprise reorganization details the regulations of the Notice of the Ministry of Finance and the State Administration of Taxation on several issues concerning the enterprise income tax treatment on enterprise reorganization, and is the major basis to administrate the enterprise income tax on enterprise reorganization, therefore, enterprises should pay high attention to it. Hwuason will make a follow-up detailed analysis on the measure, assist enterprises with better understanding the measure and solve the tax-related issues faced by enterprise during reorganization.
Hwuason Lawyers is pleased to team up with the Australian, British and Israeli Chambers of Commerce in Beijing for a forum on mergers and acquisitions in China.
The seminar will be held on 16 March 2010 at the Sofitel Wanda. Matthew McKee, co-director of Hwuason’s International Taxation Services team, will deliver a presentation on the tax issues in respect of China M&A transactions.
Topics covered will include:
- A basic overview of China’s new M&A rules
- Discussion of trends in inbound M&A in China, including analysis of the impact of laws introduced in recent years, increased scrutiny into new deals and the consequences of high-profile events impacting Sino-foreign commercial relations in the past year.
- Outline of the tax issues commonly found in China M&A deals, including an explanation of Circular 698, issued by the State Administration of Taxation in December 2009, which seeks to impose Chinese tax on off-shore equity transactions.
Co-presenters are Geraldine Putra-Johns, the director of Putra-Johns Limited, a China focused M&A legal consultancy based in London and Alex Clar, a Senior Foreign Legal Counsel with Grandal Legal Group
Whether it is to access the China markets, form alliances, invest into or acquire China companies/technologies, this seminar will provide you with an overview of the M&A landscape and information on the opportunities and risks in China in 2010.
The Beijing Austcham website has more information, including regarding registration.
About Hwuason. Hwuason Lawyers was the first specialist tax law firm in China. A commitment to combining tax and legal services distinguishes Hwuason from other tax advisors. The firm offer clients an alternative to the ‘big 4′ accounting firms, both in terms of costs and the breadth of services provided, which includes M&A, tax controversy, cross-border and general tax.
For more information about Hwuason: www.hwuason.com