State Administration of Taxation, Income Tax Treatment of Enterprise Debt Restructuring Measures

Issued: January 23 2003
Effective: March 1 2003
Applicability: For the purposes of these Measures "debt restructuring " refers to all matters concerning the modification of the terms of the debt between a debtor enterprise and a creditor enterprise (Article 2).

Main contents: Debt restructuring may include discharge of a debt with an amount of cash that is less than the amount of the taxable cost of debt, with a non-cash asset, through conversion of the debt into capital, other modification of the terms of the debt or any combination of the above methods (Article 3). Generally, the difference between the taxable cost of the debt being restructured and the amount of cash paid or the fair value of the non-cash asset transferred in discharging the debt shall be credited to the taxable income of the debtor as a current debt restructuring gain and debited against the taxable income of the creditor as a current debt restructuring loss (Article 6). Where a debt restructuring is between two affiliated parties and involves a transfer of profits, such transfer may also be treated as provided in Articles 4-8 of the Measures if it is agreed in a court judgment or an agreement among all creditors or if it is part of an approved debt-equity swap of a State-owned enterprise (Article 9). Otherwise the concessions made by one affiliate to another in a debt restructuring shall be treated as donation and shall not be recognized by the creditor as a debt restructuring loss (Article 10). The Measures also provide that if the debt restructuring gain so determined is large and results in an amount of income tax difficult to pay in a lump sum, the income tax may be amortized over no more than five years subject to approval of the competent tax authority (Article 8).
Related legislation: PRC Enterprise Income Tax Tentative Regulations, Dec 13 1993, CLP 1994 No.1 p9; PRC Enterprise Income Tax Tentative Regulations Implementing Rules, Feb 4 1994, CLP 1994 No.3 p8 and Several Income Tax Questions Concerning Enterprise Equity Investments Circular, Jun 21 2000, CLP 2000 No.7 p15