Tax Issues in Acquisition of Equity Interest in Domestic Enterprises

By DixonZhang and Jeffrey Ding, Fangda Partners, Shanghaiand Shenzhen

The landmark Acquisition of Domestic Enterprises by Foreign Investors Tentative Provisions (外国投资者并购境内企业暂行规定)(the Tentative Provisions) provide three legal forms for foreign investors to acquire domestic enterprises: (i) direct purchase of equity interest in a domestic enterprise; (ii) subscription of increased registered capital of a domestic enterprise; and (iii) assets transfer.

In order to clarify certain tax issues in connection with foreign investors' acquisitions of equity interests in domestic enterprises in the form of either "direct purchase of equity interest in a domestic enterprise" or "subscription of increased registered capital of a domestic enterprise", the State Administration of Taxation (SAT) on May 28 2003 issued the Tax Issues Relevant to Acquisition of Equity Interest in Domestic Enterprises by Foreign Investors Circular (the Circular), which is effective retroactively as of January 1 2003.