China Clarifies Special Tax Treatment in Equity Transfers between Resident Enterprises
China’s State Administration of Taxation (SAT) has recently clarified tax policies for equity and asset transfers between tax resident enterprises. Chinese tax resident enterprises are generally subject to Chinese corporate income tax (CIT) on the gain derived from the transfer of equity shares or assets. However, under the new tax policy, equity transfers between Chinese tax resident companies that meet specific criteria may be eligible for tax deferral and a temporary CIT exemption. The policy applies to all types of enterprises including wholly foreign-owned enterprises (WFOE).
Based on the new rules, four types of equity transfers will be included in the preferential tax treatment, specifically:
Equity or asset transfers from a parent company to its 100 percent directly controlled subsidiary
1. The parent company transfers the equity or assets held by it to the subsidiary based on the net book value, and the parent company receives 100 percent equity payment from the subsidiary.
2. The parent company transfers the equity or asset held by it based on the net book value to the subsidiary but the parent company does not receive payment.
Equity or asset transfers from a 100 percent directly controlled subsidiary to its parent company
3. The subsidiary transfers the equity or asset held by it based on the net book value to the parent company but the subsidiary does not receive payment.
Equity or asset transfers between subsidiaries that are subject to 100 percent direct control of the same parent company
4. Under the direction of the parent company, one subsidiary transfers the equity or asset held by it based on the net book value to another subsidiary, and the transferor does not receive payment.
Companies need to make sure that such equity transfers have reasonable business purpose: the company’s original business activities may not be changed within 12 consecutive months after the equity transfer; and neither the transferor nor the transferee has recognized such equity or asset transfers as losses or profits for accounting purposes. In the case where the investor make any change to the company’s primary business activities, the nature of the company or the equity structure within 12 months after the equity transfer, they are required to report the changes to the local tax bureau within 30 days after the change is made.
Furthermore, the tax bureau clarified accounting rules concerning such equity transfers. The pre-approval by the tax bureau for equity/asset transfers will be abolished. Instead, enterprises are required to submit the declaration form and other relevant documents (including the general description of equity/asset transfer, the description of the net book value and taxation basis of the equity/asset transferred etc.) upon the annual taxes consolidation and payment.
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