On 7 March 2014, the State Council published opinions2 on improving the market environment for corporate reorganizations. The opinions call for action from the relevant authorities to support corporate reorganizations. The actions called for include improving or implementing tax incentives, simplifying or canceling approval procedures, improving financing services for mergers and acquisitions, etc.
Notably, the opinions state that enterprise income tax policy will be amended (i) to broaden the scope of corporate reorganizations that qualify for tax-free treatment and (ii) to lower the 75% minimum of the target’s total shares/assets that must be acquired in order for a share/asset acquisition to receive tax-free treatment.
The opinions also direct the tax bureaus to implement the transfer of a going concern (“TOGC’) treatment. As background, effective from 1 March 2011, a taxpayer’s asset transfer should not be subject to value-added tax (“VAT”) or business tax if the taxpayer transfers all of its assets, or all of its assets related to a line of business, together with the related creditor’s rights, liabilities and work force by means of a merger, split, sale or exchange. This VAT exempt status is usually referred to as the TOGC rule in China.
However, PRC law has not provide any recordal or approval procedures for the TOGC treatment. Therefore, as a practical matter, the tax authorities rarely allow TOGC treatment. In addition, other than taxpayers in the real estate and financial industries, most taxpayers rarely apply for TOGC treatment because taxpayers do not have an incentive to apply for it under
the VAT pilot program. China is now implementing a VAT pilot program that is intended to replace business tax with VAT by the end of 2015. Except for taxpayers in the real estate and financial industries, most taxpayers are within the scope of the VAT pilot program. In a taxable TOGC transaction, VAT paid by the seller can be credited as input VAT by the buyer.
Please be aware that the opinions published by the State Council are just policy directives; it remains to be seen whether or how the tax authorities will turn these directives into detailed rules.
