On 7 March 2014, the State Council published Opinions on Improving the Market Environment for Corporate Reorganisations. The opinions call for action from the relevant authorities to support corporate reorganisations. The actions called for include improving or implementing tax incentives, simplifying or cancelling approval procedures, and improving financing services for mergers and acquisitions.
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Notably, the opinions state that enterprise income tax policy will be amended: (i) to broaden the scope of corporate reorganisations that qualify for tax-free treatment; and (ii) to lower the 75% minimum of the target’s total shares/assets that must be acquired in order for a share/asset acquisition to receive tax-free treatment.
The opinions also direct the tax bureaus to implement transfer of a going concern (TOGC) treatment. As background, effective from 1 March 2011, a taxpayer’s asset transfer should not be subject to value-added tax (VAT) or business tax if the taxpayer transfers all of its assets, or all of its assets related to a line of business, together with the related creditor’s rights, liabilities and workforce by means of a merger, split, sale or exchange. This VAT-exempt status is usually referred to as the TOGC rule in China.
However, PRC law does not provide any recordal or approval procedures for TOGC treatment. Therefore, as a practical matter, tax authorities rarely allow TOGC treatment. In addition, other than taxpayers in the real estate and financial industries, taxpayers rarely apply for TOGC treatment because taxpayers do not have an incentive to apply for it under the VAT pilot programme. China is now implementing a VAT pilot programme that is intended to replace business tax with VAT by the end of 2015. Except for taxpayers in the real estate and financial industries, most taxpayers are within the scope of the VAT pilot programme. In a taxable TOGC transaction, VAT paid by the seller can be credited as input VAT by the buyer.
Be aware that the opinions published by the State Council are just policy directives; it remains to be seen whether, or how, the tax authorities will turn these directives into detailed rules.
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Business Law Digest is compiled with the assistance of Baker & McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker & McKenzie by e-mail at: Zhang Danian (Shanghai) danian.zhang@bakermckenzie.com
