On December 29, 2008, the State Administration for Taxation (SAT) and the Ministry of Finance (MOF) jointly promulgated the Circular on Several Deed Tax Policies Concerning Enterprise Reorganization and Restructuring, (Cai Shui (2008) 175, Circular 175). Circular 175 took effect on January 1, 2009, and will be effective through December 31, 2011.  

Under Circular 175, when a non-company enterprise is restructured into a limited liability company (LLC) or a company limited by shares (CLS), or when an LLC is restructured into a CLS, the deed tax on the title transfer from the original company to the new company of the land use rights and property rights to any buildings on the land (the Title Transfer Deed Tax) will be exempted. When a wholly state-owned enterprise or company uses part of its assets to invest in and establish a new company with other persons, the Title Transfer Deed Tax will be exempted if such state-owned enterprise or company holds more than 50 percent equity in the new company. When a statecontrolled company uses part of its assets to invest in and establish a new company, the Title Transfer Deed Tax will be also exempted if such state-controlled company holds more than 85 percent equity in the new company. A “state-controlled company” refers to an LLC for which 50 percent or more of its registered capital is state-owned, or a CLS for which 50 percent or more of its capital stock is state-owned.

Circular 175 reaffirms that an equity transfer by an enterprise will not trigger deed tax liability since the title to the enterprise’s land use rights and property rights is not being transferred. In addition, when two or more enterprises merge to establish a new enterprise and the original investors of the two or more enterprises remain, the Title Transfer Deed Tax will be exempted when the new company obtains the land use rights and property rights from the original enterprises. Similarly, in an enterprise spin-off, the Title Transfer Deed Tax will be exempted when the spin-off enterprises obtain the land use rights and property rights from the original enterprise, as long as the investors of the spin-off enterprises are the same as those of the original enterprise.  

When the assets of a state-owned or collectively-owned enterprise are sold and the enterprise is deregistered: (1) half of the Title Transfer Deed Tax will be exempted if the buyer properly arranges for the livelihood of all of the original enterprise’s employees and executes employment contracts with more than 30 percent of the original enterprise’s employees, with each contract having an employment term of not less than 3 years (Qualified Employment Contracts); or (2) all Title Transfer Deed Tax will be exempted if the buyer executes Qualified Employment Contracts with all of the original enterprise’s employees.  

When an enterprise is deregistered or goes bankrupt and its creditors (including the enterprise’s employees) obtain the title to its land use rights or property rights as payment of debts, the Title Transfer Deed Tax will be exempted. But when such title is obtained by a non-creditor: (1) half of the Title Transfer Deed Tax will be exempted if the non-creditor properly arranges for the livelihood of all of the original enterprise’s employees and executes Qualified Employment Contracts with more than 30 percent of the original enterprise’s employees; or (2) all Title Transfer Deed Tax will be exempted if the non-creditor executes Qualified Employment Contracts with all of the original enterprise’s employees.  

Where an enterprise transfers debt into equity with the State Council’s approval, the Title Transfer Deed Tax will be exempted when the successor company obtains the title to the land use rights and property rights from the original enterprise. Where the government adjusts or reallocates stateowned assets, no Title Transfer Deed Tax will be levied. During enterprise reorganization or restructuring, no Title Transfer Deed Tax will be levied if the transfer is free and between or among enterprises affiliated with the same investors (e.g., between or among a parent company and its wholly-owned subsidiaries, between or among a company’s wholly-owned subsidiaries, or between or among a natural person and his/her sole proprietorships or one-person LLC).  

Circular 175 restates the preferential deed tax treatment for enterprise reorganization and restructuring previously set forth in a series of circulars by SAT and/or MOF.