Ministry of Finance and State Administration of Taxation, Taxation Policy Concerning Enterprises Involving Debt-to-Equity Swaps Circular

Issued: February 5 2005

Main contents: The Circular specifies the policies on value-added tax, consumption tax and enterprise income tax involved in the course of debt-to-equity swap of enterprises carrying out debt-to-equity swap with the approval of the State Council. It stipulates that if according to the debt-to-equity swap agreement signed between an enterprise to carry out debt-to-equity swap and a financial asset management company the original enterprise involved in the debt-to-equity swap invests goods assets in the new company after the debt-to-equity swap, value-added tax shall be exempted; if the original enterprise involved in the debt-to-equity swap invests taxable consumer goods in the new company after the debt-to-equity swap, consumption tax shall be exempted. The aforesaid preferential policy should be implemented starting from the day the State Council approves the said enterprise to carry out the debt-to-equity swap scheme, but such value-added tax and consumption tax already collected before the Circular is issued will not be refunded (Section One). The Circular also stipulates that the enterprise income tax on the increase in profit of the new company after the debt-to-equity swap because of the reduction in interest payment should be refunded to the original enterprise carrying out the debt-to-equity swap scheme. The said original enterprise should use the refund to purchase the financial asset management company's equity in the new company after the debt-to-equity swap, and the state capital in the original enterprise should be increased. The aforesaid preferential policies should be valid from January 1 2004 to December 31 2008 for the time being.