In the October 2013 issue of our China Tax Monthly, we reported that the tax incentives for the China (Shanghai) Pilot Free Trade Zone (“SHPFTZ”) provided in Guo Fa  No. 38 were just policy directives and open to interpretation in exactly how the tax authorities would turn these directives into detailed rules. Recently, these policy directives became concrete rules on tax incentives for investment-related capital gains under Cai Shui  No. 91 (“Notice 91”).
Notice 91 permits a company incorporated in the SHPFTZ to pay in equal installments over a period of up to five years the income tax due on capital gains derived from transfers of non-monetary assets in designated corporate restructurings. This effectively amounts to a tax deferral treatment. To qualify for this tax deferral treatment, the transferor must be incorporated and operating in the SHPFTZ, and must calculate its enterprise income tax (“EIT”) based on actual profits rather than deemed profits. For the purpose of Notice 91, a designated corporate restructuring refers to: (i) the incorporation of a new company through the contribution of non-monetary assets; (ii) a share acquisition in exchange for non-monetary assets; or (iii) an asset acquisition in exchange for non-monetary assets.