Following the release of Circular 141 on improving enterprise income tax (“EIT”) policies for non-monetary asset investments, and Circular 1162 on EIT deferral treatment for non-monetary asset investments, as well as the feedback received by local tax authorities, on May 8, 2015, the State Administration for Taxation (“SAT”) issued Announcement  No. 33 (“Announcement 33”) to further clarify tax collection matters relating to the EIT deferral treatment provided in Circular 116 (see our Legal Flash of January 2015 for information on Circular 116).
Announcement 33’s main highlights:
- Under Circular 116, income registered by a resident enterprise from a qualified contribution of non-monetary assets, calculated as the difference between the fair market value of the non-monetary assets —in an independent valuation— and their original tax basis, may be subject to EIT through yearly installments for up to five years.
Announcement 33 clarifies that only a resident enterprise operating on an actual accounting basis can apply for this EIT deferral treatment (i.e., a resident enterprise operating on deemed profit basis is not eligible for the EIT deferral treatment, as it cannot accurately account its income or expenses).
- Announcement 33 clarifies that “up to five years” means no more than five consecutive tax years starting the year the income from the non -monetary asset investment is recognized as taxable. It also establishes formalities that must be fulfilled in the annual tax filing (completion of specific forms) throughout the five-year period, and that the resident investor must keep all relevant documents available (such as agreements, assessments and reports).
- Under Circular 116, resident investors must recognize the income as taxable from the date the investment agreement becomes effective and the equity registration procedures are completed.
For non-monetary asset investments between related parties, according to Announcement 33, if the equity registration procedures are not completed within 12 months from the date the investment agreement becomes effective, the resident investor will recognize the income as taxable from the date the agreement becomes effective.
- Announcement 33 also clarifies that, when a non-monetary asset investment qualifies for any of the tax deferral treatments under Circular 59, Circular 109 and Circular 116, the resident investor can choose the regime it wishes to apply. However, once chosen, the resident investor cannot change the regime.
Announcement 33 applies to the 2014 EIT annual declaration and onwards. It also applies to the completed or pending non-monetary asset investments eligible for the EIT tax deferral treatment under Circular 116 and under the Announcement that have not yet been settled.
Date of issue: May 8, 2015. Date of effectiveness: January 1, 2014.