In December 2014, the Ministry of Finance (“MoF”) and the State Administration of Taxation (“SAT”) jointly released Circular Caishui [2014] No. 109 (“Circular 109”) to expand the scope of enterprise income tax (“EIT”) deferral treatment. Under Circular 109, transfer of equity or assets within a group was introduced as a new transaction eligible for EIT tax deferral treatment (see our Legal Flash of January 2015 for information on Circular 109).

However, Circular 109 only provided general guidelines and criteria, leading to practical issues that required clarification regarding the application of the tax deferral treatment to these new transactions.

To better implement Circular 109, on May 27, 2015, the SAT released Announcement [2015] No. 40 (“Announcement 40”) to clarify practical issues on the administration of the tax deferral treatment for eligible group transfers.

Announcement 40’s main highlights:

  1. Scope of eligible group transfers

Under Circular 109, eligible group transfers should be conducted between (i) resident enterprises directly holding 100%  of the other’s shares, or (ii) resident enterprises 100% directly owned by the same enterprise(s).

Announcement 40 limits eligible group transfers to the following four transactions and provides the corresponding tax deferral treatment:

Click here to view table.

  1. Filing obligation for the tax deferral treatment

Under Announcement 40, both parties to the transaction must apply the same tax treatment consistently. If they apply the tax deferral treatment, they must separately file with the relevant in-charge tax authorities a standard reporting form and other supporting documents with the annual EIT declaration for the year the transfer occurs.

For the following annual EIT declaration, both parties must separately file with the relevant tax authorities a report stating that the original business activities of the transferred equity or assets have not changed in the 12 months following the transfer (from when the transfer was completed and received the corresponding accounting treatment) to prove the transaction is still eligible.

If a group transfer no longer qualifies for the tax deferral treatment (if there is a change in either party’s business activities, company natu re or shareholding structure in the 12 months following the transfer), the relevant party must report to the in-charge tax authority within 30 days following the change and notify the other party. The other party, in turn, must also report to the in-charge tax authority within 30 days of the notification.

Within 60 days following the change, both parties must (i) adjust the taxable income for the year the transfer occurred and the tax basis of the transferred equity or assets according to the general tax treatment, retroactively; (ii) and submit the adjusted EIT annual declaration form to the in-charge tax authorities and calculate the EIT payable for group transfers.

Announcement 40 is applicable to the 2014 EIT annual declaration onwards, and to completed corporate restructuring transactions that have not been dealt with for tax purposes.

Date of issue: May 27, 2015. Effective date: January 1, 2014.