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Q:
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What types of restructuring are there?
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A:
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Business restructuring includes changes in the legal form of a business, debt restructuring, equity acquisitions, asset acquisitions, mergers and demergers.
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Q:
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What are the separate rules applicable to the tax treatment of business reorganisations?
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A:
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The tax treatment of corporate restructuring distinguishes between general tax treatment provisions and special tax treatment provisions that apply under different conditions.
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Q:
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How are the transactions related to a business combination treated under the application of the general tax treatment?
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A:
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1.
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The consolidated enterprise shall determine the tax basis of each asset and liability of the receiving consolidated enterprise at fair value.
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2.
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Both the consolidated enterprise and its shareholders shall be treated for income tax purposes on a liquidation basis.
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3.
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Losses of the consolidated enterprise shall not be carried forward to be compensated in the consolidated enterprise.
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Q:
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What conditions must be met in order for the special tax treatment to apply to a corporate reorganisation?
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A:
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The following conditions need to be met at the same time.
1.
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It has a reasonable business purpose and does not have the primary purpose of reducing, exempting or deferring the payment of tax.
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2.
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The proportion of assets or equity interests in the acquired, merged or demerged portion is in accordance with the prescribed ratio.
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3.
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The original substantive business activities of the restructured assets are not changed within 12 consecutive months after the restructuring of the enterprise.
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4.
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The amount of the consideration for the restructuring transaction involving equity payment is in accordance with the prescribed ratio. (For a business combination, the amount of equity payment obtained by the shareholders of the enterprise at the time of such business combination is not less than 85% of its total transaction payment, as well as under the same control and without the need to pay consideration.)
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5.
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The former major shareholder who acquires equity payments in a business reorganisation may not transfer the acquired equity interest for a period of 12 consecutive months after the reorganisation.
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Q:
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How are the transactions related to a business combination treated under the application of special tax treatment?
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A:
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1.
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The tax basis of the consolidated enterprise in accepting the assets and liabilities of the consolidated enterprise shall be determined by the original tax basis of the consolidated enterprise.
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2.
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The relevant income tax matters of the consolidated enterprise before the merger shall be inherited by the consolidated enterprise.
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3.
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The limit of the losses of the consolidated enterprise that can be made up by the consolidated enterprise = the fair value of the net assets of the consolidated enterprise x the interest rate of the longest maturity of the state bonds issued by the state as at the end of the year in which the consolidated operation takes place.
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4.
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The tax basis of the shareholders of the consolidated enterprise in acquiring equity interests in the consolidated enterprise shall be determined by the tax basis of their original equity interests in the consolidated enterprise.
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