PRC Ministry Of Finance To Release New Tax Rules: Corporate Re-Structuring

Asia Tax Blog reports that ….

New tax rules relating to the tax treatment of certain corporate restructuring transactions are expected to be finalized soon by the PRC Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”).

The blog goes on to report

Under China’s pre-2008 foreign enterprise income tax (“FEIT”) regime, the SAT issued guidance on the tax treatment of corporate restructuring transactions, including Guo Shui Fa [1997]. No 71 (“Circular 71”) and Guo Shui Han Fa [1997].No 207 (“Notice 207”). Circular 71 provided detailed guidelines on the tax treatment of corporate restructuring transactions, including mergers, spin-offs, asset transfers and share restructurings. Notice 207 confirmed that a foreign investor could transfer its equity interest in a Chinese enterprise to a 100% related enterprise at cost, provided a commercial-purpose test could be satisfied. The guidance provided in Circular 71 and Notice 207 was interpreted by many foreign investors as indicating preferential tax policies under the FEIT regime.

In principle, however, the favorable tax treatment granted under Circular 71 and Notice 207 terminated once the Enterprise Income Tax Law (“EIT Law”) became effective on January 1, 2008, unless further regulations are issued by SAT and MOF to maintain it. Such Implementation Rules, covering specific matters such as the taxation of corporate restructuring, are expected be issued soon. Enterprises are nearing the deadline to report their corporate restructurings in annual EIT filings and guidance is needed soon on the tax treatment of such transactions (such filings are generally due before the end of May, but there are slight difference in some places). Guidance is also necessary given the significant role that tax considerations play in the planning and structuring of potential corporate transactions

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