Measures for the Administration of Enterprise Income Tax in Connection with Enterprise Re-organisation

(Issued by the State Administration of Taxation on July 26 2010 and effective as of January 1 2010.)

SAT Announcement [2010] No.4

If an enterprise has completed a re-organisation at the time of the issuance hereof and the special tax treatment specified in the Ministry of Finance and State Administration of Taxation, Circular on Several Issues Concerning the Enterprise Income Tax Treatment of Enterprise Re-organisations (Cai Shui [2009] No.59) were applied in respect of such re-organisation and it did not prepare relevant materials in accordance with the requirements hereof, it shall prepare such materials. If it requires the confirmation of the tax authority, such confirmation shall be secured in accordance with the requirements hereof. If tax treatment for an enterprise re-organisation in 2008 or 2009 has not yet been carried out, matters may be handled in accordance with these Measures.

Measures for the Administration of Enterprise Income Tax in Connection with Enterprise Re-organisation

Part One: General provisions and definitions

Article 1: These Measures have been formulated pursuant to relevant provisions such as the PRC Enterprise Income Tax Law(Tax Law) and its Implementing Regulations (the Implementing Regulations), the PRC Law on the Administration of the Levy and Collection of Taxes and its Implementing Rules (the Tax Levy Law) and the Ministry of Finance and State Administration of Taxation, Circular on Several Issues Concerning the Enterprise Income Tax Treatment of Enterprise Re-organisations (Cai Shui [2009] No.59; the Circular) in order to regulate and strengthen the administration of enterprise income tax in connection with enterprise re-organisation.

Article 2: For the purposes of these Measures, the term “enterprise re-organisation” means the various types of re-organisations specified in Article 1 of the Circular, such as a change in an enterprise's legal form, debt restructuring, equity acquisition, asset acquisition, merger and division.

Article 3: When an enterprise undergoes a re-organisation, the parties thereto shall, depending on the type of re-organisation, refer to the following enterprises respectively:

(1) the parties in a debt restructuring refer to the debtor and the creditor;

(2) the parties in an equity acquisition refer to the acquirer, the transferor and the acquired enterprise;

(3) the parties to an asset acquisition refer to the transferor and the transferee;

(4) the parties in a merger refer to the merged enterprise, the merger target(s) and the shareholders of each party;

(5) the parties in a division refer to the spin-off, the dividing enterprise and the shareholders of each party.

Article 4: Each of the parties in a re-organisation shall adopt the same tax treatment principles, i.e. they shall all adopt either the general or special tax treatment.

Article 5: For the purposes of Item (4) of Article 1 of the Circular, the term “substantive business assets” means assets used by the enterprise to engage in its production and operational activities and that have a direct connection with its production and operating revenues, and includes the various types of assets used in operations, the commercial information and technology owned by the enterprise, the receivables arising in connection with business activities, investment assets, etc.

Article 6: For the purposes of Article 2 of the Circular, the term “controlled enterprise” means the enterprise that has shares directly owned by the acquiring enterprise.

Article 7: The determination of the re-organisation date for an enterprise re-organisation as specified in the Circular shall be handled in accordance with the following provisions:

(1) in a debt restructuring, the date on which the debt restructuring contract or agreement enters into effect shall be the re-organisation date;

(2) in an equity acquisition, the date on which the transfer agreement enters into effect and the procedures for registration of the equity change are completed shall be the re-organisation date;

(3) in an asset acquisition, the date on which the transfer agreement enters into effect and the assets are actually delivered shall be the re-organisation date;

(4) in an enterprise merger, the date on which the merged enterprise obtains the title to the merger target's or targets' assets and completes the procedures for the amendment of business registration shall be the re-organisation date; and

(5) in an enterprise division, the date on which the spin-off obtains the title to the assets of the dividing enterprise and completes the procedures for the amendment of business registration shall be the re-organisation date.

Article 8: The determination of the year in which a re-organisation is completed may be arrived at based on the accounting guidelines applied by the parties. Specifically, reference shall be made to the parties' audited annual financial reports. In the event that there is a discrepancy in the determination of the year in which a re-organisation was completed due to the parties applying different accounting guidelines, the parties shall hold consultations to settle on the tax year that is to be considered as the year of completion of the re-organisation.

Article 9: For the purposes of these Measures, the term “appraisal institution” means a qualified PRC asset appraisal institution.

Part Two: Administration of general tax treatment of enterprise re-organisation

Article 10: If an enterprise is converted from a legal person into a wholly individually-owned enterprise, partnership or other such organisation without legal personality or if its place of registration is changed to a place outside the People's Republic of China (including to Hong Kong, Macao or Taiwan) as specified in Item (1) of Article 4 of the Circular, it shall be liquidated in accordance with the Ministry of Finance and the State Administration of Taxation, Circular on Several Issues Concerning the Enterprise Income Tax Treatment of Enterprise Liquidations (Cai Shui [2009] No.60).

When submitting its Income Tax Return for Enterprise Liquidation, the enterprise shall additionally submit the following materials:

(1) the approval document of the administration for industry and commerce or other government department for the change in the enterprise's legal form;

(2) the tax basis of all of the enterprise's assets and the asset appraisal report issued by an appraisal institution;

(3) an account of the handling or vesting of the enterprise's claims and debts; and

(4) other materials and certificates as requested by the competent tax authority.

Article 11: If an enterprise undergoes a debt restructuring as specified in Item (2) of Article 4 of the Circular, it shall prepare the following relevant materials for inspection by the tax authority:

(1) if it discharges its debts with non-monetary assets, it shall retain the debt discharge agreement or contract entered into by the parties and lawful evidence confirming the fair value of the non-monetary assets, etc.; or

(2) if claims are converted to equity, it shall retain the agreement or contract for conversion of the claims into equity entered into by the parties.

Article 12: If an enterprise undergoes a re-organisation in the form of an equity acquisition or asset acquisition as specified in Item (3) of Article 4 of the Circular, it shall prepare the following relevant materials for inspection by the tax authority:

(1) the equity acquisition or asset acquisition contract or agreement entered into by the parties; and

(2) lawful evidence of the fair value of the relevant equity or assets.

Article 13: If an enterprise/enterprises is/are involved in a merger as specified in Item (4) of Article 4 of the Circular, it/they shall undergo liquidation in accordance with document Cai Shui [2009] No.60.

When submitting its/their Income Tax Return(s) for Enterprise Liquidation, the merger target(s) shall additionally submit the following materials:

(1) the approval document(s) of the administration(s) for industry and commerce or other government department(s) for the enterprise merger;

(2) the tax basis of all of the enterprise's or enterprises' assets and liabilities and the asset appraisal report(s) issued by an appraisal institution;

(3) an account of the handling or vesting of the enterprises' debts; and

(4) other materials and certificates as requested by the competent tax authority.

Article 14: If an enterprise undergoes a division as specified in Item (5) of Article 4 of the Circular, and the dividing enterprise ceases to exist, it shall undergo liquidation in accordance with document Cai Shui [2009] No.60.

When submitting its Income Tax Return for Enterprise Liquidation, the dividing enterprise shall additionally submit the following materials:

(1) the approval document of the administration for industry and commerce or other government department for the enterprise division;

(2) the tax basis of all of its assets and the asset appraisal report issued by an appraisal institution;

(3) an account of the handling or vesting of its debts; and

(4) other materials and certificates as requested by the competent tax authority.

Article 15: In an enterprise merger or division, if the period for the transitional tax breaks enjoyed by the enterprises that are parties to the merger or by the spin-off as specified in Article 57 of the Tax Law with the respect to the entire enterprise (i.e. all production and business income) has not expired, matters with respect to the tax break the enjoyment of which by the surviving enterprise(s) has/have not been completed shall be handled in accordance with Article 9 of the Circular. The tax breaks not fully enjoyed by the deregistered merger target(s) or dividing enterprise shall not be succeeded to by the surviving enterprise(s). The enterprise newly established as a result of the merger or division shall not succeed to or enjoy anew the aforementioned tax breaks. The issue of the succession to the tax breaks on income from the production and operating items of an enterprise in accordance with the tax break provisions of the Tax Law and transitional tax break policies by enterprises that are parties in a merger or division shall be handled in accordance with Article 89 of the Implementing Regulations.

Part Three: Administration of special tax treatment of enterprise re-organisation

Article 16: If an enterprise re-organisation satisfies the conditions set forth in the Circular and special tax treatment is opted for, record filing shall be carried out in accordance with Article 11 of the Circular. If the parties to the re-organisation require the confirmation of the tax authority, they may opt to have the leading party in the re-organisation submit an application to the competent tax authority, which shall submit the same through the hierarchy to the provincial tax authority for the confirmation.

If an application for confirmation is made, and the leading party and the other parties are located in different provinces (autonomous regions or cities), the provincial tax authority of the leading party shall send copies of the confirmation document to the provincial tax authorities of the places where the other parties are located.

Once the provincial tax authority receives the application for confirmation, it shall in principle complete the confirmation before the final settlement of enterprise income tax for the year in question. If, due to special circumstances, a delay is required, the reason for such delay shall be made known to the leading party.

Article 17: The leading party in an enterprise re-organisation shall be determined in accordance with the following principles:

(1) in a debt restructuring, it shall be the debtor;

(2) in an equity acquisition, it shall be the equity transferor;

(3) in an asset acquisition, it shall be the asset transferor;

(4) in a merger by absorption, it shall be the proposed enterprise surviving the merger, and in a merger by new establishment, it shall be the enterprise with the greater assets prior to the merger; and

(5) in a division, it shall be the dividing enterprise or the surviving enterprise.

Article 18: When an enterprise undergoes a re-organisation, it shall, in accordance with the requirements of Item (1) of Article 5 of the Circular, at the time of record filing or submission of the application for confirmation, give an account from the following perspectives as to why the enterprise re-organisation has rational commercial objectives:

(1) transaction method of the re-organisation activities: namely the specific form that the re-organisation activities are to take, the background to the transaction, the time of the transaction, the method of operation before and after the transaction and relevant business norms;

(2) the apparent and actual nature of the transaction: namely the apparent legal rights and liabilities arising from the transaction, in other words, the legal consequences of the transaction; additionally, the ultimate outcome of the transaction arising in fact or commercially;

(3) the possible changes to the tax situations of the parties to the transaction caused by the re-organisation activities;

(4) the changes in the financial positions of the parties to the re-organisation arising from the transaction;

(5) whether the re-organisation activities give the parties to the transaction irregular economic benefits or latent obligations that would not have arisen under market principles; and

(6) details of the participation in the re-organisation activities by a non-resident enterprise.

Article 19: For the purposes of Items (3) and (5) of Article 5 of the Circular, the phrase “12 consecutive months following the enterprise re-organisation” means 12 consecutive months counting from the re-organisation date.

Article 20: The term “original main shareholder(s)” specified in Item (5) of Article 5 of the Circular mean(s) the shareholder(s) that originally held at least 20% of the equity of the enterprise being transferred or acquired.

Article 21: The phrase “subject to the same control” specified in Item (4) of Article 6 of the Circular means that the enterprises involved in the merger are subject to the ultimate control of one party or the same multiple parties both before and after the merger and such control is not temporary. The “same multiple parties that can exercise ultimate control over the enterprises involved in the merger both before and after the merger” means the group of investors that, pursuant to a contract or agreement, have decisive control over the financial and business policies of the enterprises involved in the merger. Before the merger, the parties involved in the merger shall have been subject to the control of the ultimate controller(s) for at least 12 months, and the time that the entity arising after the enterprise merger is subject to the control of the ultimate controller shall also be at least 12 consecutive months.

Article 22: If an enterprise undergoes a debt restructuring as specified in Item (1) of Article 6 of the Circular, it shall, depending on the circumstances, prepare the following materials:

(1) if the taxable income arising from the debt restructuring accounts for at least 50% of the enterprise's taxable income for the year in question and the enterprise requests that the debt restructuring income be equally included in the taxable income over five tax years, the enterprise shall prepare the following materials:

1. an account of the overall situation of the parties' debt restructuring (here and hereinafter, if confirmation is applied for, the application shall have been made by the enterprise), and such account shall include the commercial objectives of the debt restructuring;

2. the debt restructuring contract or agreement executed by the parties;

3. an account of the taxable income arising from the debt restructuring and the enterprise's taxable income for the year in question; and

4. other materials and certificates as requested by the tax authority;

(2) in the case of a debt for equity swap, the debtor provisionally does not, in respect of debt discharge, recognise gains or losses and the creditor determines the tax basis of the equity investment based on the tax basis of the original claims, the enterprise shall prepare the following materials:

1. an account of the overall situation of the parties' debt restructuring, and such account shall include the commercial objectives of the debt restructuring;

2. the debt for equity contract or agreement executed by the parties;

3. proof of the fair value of the equity swapped by the enterprise;

4. documentation showing that the administration for industry and commerce and relevant departments approved the relevant change in the enterprise's equity; and

5. other materials and certificates as requested by the tax authority.

Article 23: If enterprises are involved in an equity acquisition as specified in Item (2) of Article 6 of the Circular, they shall prepare the following materials:

(1) an account of the overall situation of the parties' equity acquisition, and such account shall include the commercial objectives of the equity acquisition;

(2) the equity acquisition contract or agreement executed by the parties;

(3) proof issued by an appraisal institution as to the fair value of the equity transferred and paid;

(4) materials showing that the re-organisation satisfies the conditions for special tax treatment, including the equity percentages, details of the payment of the consideration and an undertaking to the effect that the existing substantive business activities conducted with the assets will not be changed and the original main shareholder(s) will not transfer the equity that it/they have obtained for 12 months, etc.;

(5) documentation showing that the administration for industry and commerce and other such relevant departments have approved the relevant change in the enterprises' equity; and

(6) other documentation as requested by the tax authority.

Article 24: If enterprises are involved in an asset acquisition as specified in Item (3) of Article 6 of the Circular, they shall prepare the following materials:

(1) an account of the overall situation of the parties' asset acquisition, and such account shall include the commercial objectives of the asset acquisition;

(2) the asset acquisition contract or agreement executed by the parties;

(3) the appraisal report for the assets involved in the asset acquisition issued by an appraisal institution;

(4) valid proof of the tax basis of the equity of the transferee;

(5) materials showing that the re-organisation satisfies the conditions for special tax treatment, including the percentage of the assets acquired, details of the payment of the consideration and an undertaking to the effect that the existing substantive business activities conducted with the assets will not be changed and the original main shareholder(s) will not transfer the equity that it/they have obtained for 12 months, etc.;

(6) documentation showing that the administration for industry and commerce has approved the relevant change in the enterprises' equity; and

(7) other materials and certificates as requested by the tax authority.

Article 25: If enterprises undergo a merger as specified in Item (4) of Article 6 of the Circular, they shall prepare the following materials:

(1) an account of the overall situation of the parties' enterprise merger, and such account shall include the commercial objectives of the enterprise merger;

(2) the approval document of the competent government department for the enterprise merger;

(3) an account of the equity relationship among the parties to the enterprise merger;

(4) relevant information such as the merger target's or merger targets' net assets, each asset and liability and their book values and tax basis;

(5) materials showing that the re-organisation satisfies the conditions for special tax treatment, including the percentages paid in the form of equity obtained by each of the shareholders of the pre-merger enterprises and an undertaking to the effect that the existing substantive business activities conducted with the assets will not be changed and the original main shareholder(s) will not transfer the equity that it/they have obtained for 12 months, etc.;

(6) documentation showing that the administration for industry and commerce has approved the relevant change in the enterprises' equity; and

(7) other materials and certificates as requested by the competent tax authority.

Article 26: The “limit of losses of a merger target that may be made up by the merged enterprise” specified in Item (4) of Article 6 of the Circular means the limit of the losses of a merger target that the merged enterprise may make up each year during the remaining years when the same can be carried forward as specified in the Tax Law.

Article 27: If enterprises undergo a division as specified in Item (5) of Article 6 of the Circular, they shall prepare the following materials:

(1) an account of the overall situation of the parties' enterprise division, and such account shall include the commercial objectives of the enterprise division;

(2) the approval document of the competent government department for the enterprise division;

(3) relevant information such as the dividing enterprise's net assets, and the book value and tax basis of each asset and liability.

(4) materials showing that the re-organisation satisfies the conditions for special tax treatment, including the percentages paid in the form of equity obtained by each of the shareholders of the post-division enterprise(s) and an undertaking to the effect that the existing substantive business activities conducted with the assets will not be changed and the original main shareholder(s) will not transfer the equity that it/they have obtained for 12 months, etc.;

(5) materials showing that the administration for industry and commerce has recognised the equity percentages of the shareholders of the spin-off and the dividing enterprise; after the division, photocopies of the business licences of the spin-off and the dividing enterprise; photocopies of the spin-off's and the dividing enterprise's accounting treatment of the division; and

(6) other materials and certificates as requested by the tax authority.

Article 28: Pursuant to Sub-item (b) of Item (4) of Article 6 of the Circular, the relevant pre-merger income tax items of the merger target(s) are to be succeeded to by the merged enterprise, and pursuant to Sub-item (b) of Item (5) of Article 6 of the Circular, when an enterprise is divided, the income tax items pertaining to the divested assets are to be succeeded to by the spin-off. These items include the treatment of unrecognised asset losses and of revenues recognised over several periods, the issue of the treatment of succession to tax breaks the term for the enjoyment of which has not expired, etc. With respect to the issue of the treatment of succession to tax breaks, where transitional tax breaks are enjoyed with the respect to the entire enterprise (i.e. all production and business income) in accordance with Article 57 of the Tax Law, if the nature of, and the tax break conditions applicable to, the post-merger or post-division enterprise(s) have not changed, the tax breaks of the pre-merger enterprises or of the dividing enterprise before the division may continue to be enjoyed for the term remaining. If the duration of the terms remaining for the enjoyment of the tax breaks of the pre-merger enterprises is not the same, the taxable income of the post-merger enterprise for each year shall be allocated in proportion to the percentages of the total assets of the post-merger enterprise accounted for by the assets of each of the pre-merger enterprises on the merger date, the tax payable then calculated for each based on the corresponding remaining tax break. The issue of the treatment of the succession to tax breaks enjoyed by the pre-merger enterprises or the dividing enterprise before the division in respect of relevant production and operation items in accordance with the tax break provisions of the Tax Law and transitional tax break policies shall be handled in accordance with Article 89 of the Implementing Regulations.

Article 29: Parties to which item (3) or (5) of Article 5 of the Circular apply shall, at the time of filing of the annual enterprise income tax returns in the year following completion of the re-organisation, submit an account of matters in writing to the competent tax authority to show that for 12 consecutive months after the re-organisation there was no change in the satisfying conditions for special tax treatment.

Article 30: If a change in the production or business, corporate nature, assets or equity structure, etc. of a party occurs during the specified period, resulting in the re-organisation ceasing to satisfy the conditions for special tax treatment, such party shall notify all the other parties thereof in writing within 30 days after the change. The leading party shall notify its competent tax authority of the change within 30 days after receipt of the notice.

Within 60 days after the change described in the preceding paragraph, the tax treatment of the re-organisation shall be adjusted in accordance with Article 4 of the Circular. Each original party to the transaction shall calculate its profit or loss from the re-organisation based on the fair value of its assets and liabilities at the time of completion of the original transaction, adjust the taxable income and corresponding asset and liability tax basis for the tax year in which the transaction was completed and apply to its respective competent tax authority for adjustment of its annual enterprise income tax return for the tax year in which the transaction was completed. If a party fails to adjust its return by the deadline, matters shall be handled in accordance with the relevant provisions of the Tax Levy Law.

Article 31: The competent tax authority of each party shall closely oversee the enterprise's returns or the re-organisation for which application of special tax treatment has been confirmed, and keep itself apprised of the dynamic changes in the re-organised enterprise. Upon discovering a problem, it shall, in a timely manner, communicate and liaise with the competent tax authorities of the other parties, and effect an adjustment in accordance with provisions.

Article 32: Pursuant to Article 10 of the Circular, if a re-organisation involves a transaction that is to occur in separate steps within a period of 12 consecutive months, and such steps occur in two separate tax years, the parties may, through consultations, reach a consensus to opt for special tax treatment if they anticipate after the first step that the entire transaction could satisfy the conditions for special tax treatment. After completion of the first step, they could then apply special tax treatment. After reviewing the relevant materials, the competent tax authority may, if the conditions are satisfied, provisionally approve application of special tax treatment. Once the subsequent step is effected in the second year, the relevant materials shall be prepared for confirmation of the applicability of special tax treatment in accordance with the requirements hereof.

Article 33: If the parties to the aforementioned transaction carried out in separate steps across two years cannot anticipate in the first tax year that the entire transaction will satisfy the conditions for special tax treatment, they shall apply general tax treatment. If special tax treatment is found to be applicable once the entire transaction has been completed in the following tax year, the annual enterprise income tax returns for the previous tax year may be adjusted, and if tax has been overpaid, the competent tax authorities shall refund the corresponding amounts or set the same off against the tax payable for the year in question.

Article 34: The parties in an enterprise re-organisation shall obtain and keep the vouchers and materials relating to the re-organisation. The period for keeping such vouchers and materials shall be handled in accordance with the relevant provisions of the Tax Levy Law.

Part Four: Tax administration of cross-border re-organisation

Article 35: If a re-organisation as specified in Article 7 of the Circular occurs and the provisions on special tax treatment are applicable, matters shall be handled in accordance with the relevant provisions of Part Three hereof.

Article 36: If a re-organisation as specified in Item (1) or (2) of Article 7 of the Circular occurs and special tax treatment is applicable, materials shall be prepared in accordance with the requirements of the State Administration of Taxation, Circular on the Issuance of the <Tentative Measures for the Administration of the Withholding of the Income Tax of Non-tax-resident Enterprises at Source> (Guo Shui Fa [2009] No.3) and the State Administration of Taxation, Circular on Strengthening the Administration of Enterprise Income Tax on Income Derived from the Transfer of Equity of Non-tax-resident Enterprises (Guo Shui Han [2009] No.698).

Article 37: If a re-organisation as specified in Item (3) of Article 7 of the Circular occurs, the tax-resident enterprise shall submit the following materials to the competent tax authority of the place where it is located:

(1) an account of the parties' re-organisation, and the commercial objectives of the equity transfer shall be stated in the application documents;

(2) the equity transfer agreement executed by the parties;

(3) an account of the control relationship of the parties;

(4) the appraisal report for the assets or equity issued by an appraisal institution; the report shall provide the fair value of each asset and liability being transferred;

(5) materials showing that the re-organisation satisfies the conditions for special tax treatment, including the percentage of the equity or assets being transferred, details of the payment of the consideration and an undertaking to the effect that the existing substantive business activities conducted with the assets will not be changed and the equity obtained will not be transferred for 12 months, etc.; and

(6) other documentation as requested by the tax authority.