In May 2015, the State Administration of Taxation (“SAT”) released Public Notice on Issues concerning the Collection and Administration of Enterprise Income Tax on Non-monetary Asset Investments (SAT Notice [2015] No.33, “Notice 33”) and Public Notice on the Levy and Administration of Enterprise Income Tax on Assets (Equity) Assignment (SAT Notice [2015] No.40, “Notice 40”), to further clarify the implementation rules of the tax incentive policies for M&A transactions.

Background

Towards the end of 2014, the Ministry of Finance and the SAT jointly released the Notice on Issues concerning the EIT Treatment for the Promotion of Enterprise Restructurings (Caishui [2014] No.109, “Circular 109”) and the Notice on Issues concerning the EIT Policies for Non-Monetary Asset Investments (Caisui [2014] No.116, “Circular 116”), to support the M&A transactions. 

However, both enterprises and tax authorities found that there are uncertain issues with respect to the assets/equity assignment as set forth in the Circular 109 and the non-monetary asset investments provided in the Circular 116.

Clarification on the Non-Monetary Asset Investment under Notice 33

Notice 33 made the following clarifications on non-monetary asset investment:

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Clarification on the Equity/Assets Assignment under Notice 40

Circular 109 set out an STT rule for intra-group equity/assets assignment.  Given that the term of assignment is quite uncommon since the implementation of the Enterprise Income Tax Law in 2008, the recognition of assignment has caused issues for both enterprises and tax authorities.

Notice 40 made further clarifications on intra-group equity/assets assignment based on net book value:

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To be eligible for the STT, there is one basic principle: within 12 consecutive months upon completion of assignment of the equity or assets, the original substantive business activities of the equity or assets assigned shall not be changed.