China Clarifies Corporate Income Tax Policies for Shanghai Free Trade Zone

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Dec. 11 – China’s Ministry of Finance and the State Administration of Taxation jointly issued the “Circular on Corporate Income Tax Policies for Outbound Investment with Non-monetary Assets and Other Asset Restructuring Transactions by Enterprises in the China (Shanghai) Free Trade Zone (Caishui [2013] No. 91, hereinafter referred to as ‘Circular’)” on November 15, which allows enterprises in the Shanghai Free Trade Zone (Shanghai FTZ) to defer corporate income tax payment. Detailed information can be found below.

For the purpose of the Circular, outbound investment with non-monetary assets and other asset restructuring transactions refer to the following activities:

  • Establishing a company through capital contribution with non-monetary assets;
  • Making capital contribution with non-monetary assets;
  • Equity acquisition; and
  • Asset acquisition.

Specifically, the above-mentioned equity and asset acquisition activities shall meet the conditions stipulated in the Circular on Certain Issues Concerning the Treatment of Corporate Income Tax in Enterprise Restructuring, which lays out the following definition for such activities:

  • Equity acquisition refers to a transaction where an enterprise acquires the equities of another enterprise so as to take control over the latter; and
  • Asset acquisition refers to a transaction where an enterprise purchases the substantive operating assets of another enterprise.

Preferential Policy
The Circular provides that, with regard to the asset appreciation arising from outbound investment with non-monetary assets or other asset restructuring transactions, enterprises registered in the Shanghai FTZ may pay corporate income tax for the gains from the transfer of non-monetary assets by installments within five years.

Income Calculation
According to the Circular, enterprises that make outbound investment with non-monetary assets shall appraise the non-monetary assets first, and calculate the income from the transfer of the non-monetary assets based on the balance of the appraised fair value after deducting the tax base.

The tax base for the equity acquired by an enterprise through investment with non-monetary assets shall be adjusted yearly based on the original tax base of the non-monetary assets, plus the income from the transfer of non-monetary assets included in the taxable income each year.

The tax base of the non-monetary assets acquired by the invested enterprise may be determined based on the fair value of the non-monetary assets.

Record-filling Procedure
Enterprises in the Shanghai FTZ shall go through the record-filing and registration formalities for deferred tax payment with the competent tax authority within 30 days after the relevant investment agreement has come into effect, the assets involved have been actually delivered and the equity registration formalities have been completed.

The competent tax authority shall examine the submitted documents and notify the enterprise of the record-filing and registration results within the specified timeframe.

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