Through Circular 14, the State Council also called for improving EIT policies for non-monetary asset investments. In response, on December 31, 2014, the MoF and the SAT released Caishui [2014] No.116 (“Circular 116”), providing an EIT deferral treatment for non-monetary asset investments, which became effective retroactively on January 1, 2014.

Under the EIT deferral treatment, income derived from qualified contributions of non-monetary assets, calculated as the difference between the fair  market values 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.

Resident investors must use the original tax basis of the invested non-monetary assets as the tax basis to recognize the equity investment, and make yearly adjustments to the tax basis by adding the deferred income installments; the invested company must recognize the fair market values of the non-monetary assets as its tax basis.

The conditions to qualify for the tax deferral regime are as follows:

  1. Investors must be resident enterprises.
  2. Non-monetary assets exclude assets like cash, bank deposits, receivables, note receivables, and held-to-maturity bond investments.
  3. The  investment  must  aim  to  establish  new  resident  enterprises  or contribute to existing resident enterprises.

If the treatment is not applied to the non-monetary asset investment, the resident investors must recognize the income as taxable when the relevant investment agreement becomes effective and the equity registration procedures are completed. When the investment is disposed of, or liquidated, the  tax deferral regime will no longer apply and any remaining installments must be paid immediately.

If a non-monetary asset investment qualifies for both the tax deferral treatment under Circular 59 and the tax deferral treatment under Circular 116, the invested company can choose which regime to apply. Also, taxpayers may now reassess the completed or pending non-monetary asset investments previously not eligible for the EIT tax deferral treatment that have not yet been settled.

Date of issue: December 31, 2014. Effective date: January 1, 2014.