Circular of the State Administration of Taxation on the Issuance of the Tentative Regulations on the Treatment of Income Tax in the Restructuring of Businesses such as Mergers, Divisions, Stock Right Restructuring, and Transfers of Assets by Enterprises with Foreign Investment

Circular of the State Administration of Taxation on the Issuance of the Interim Provisions on the Treatment of Income Tax on the Restructuring of Businesses such as Mergers, Divisions, Stock Right Restructuring, and Transfers of Assets by Enterprises with Foreign Investment

Guo Shui Fa [1997] No. 71

April 28, 1997

Recently, the restructuring of businesses such as mergers, divisions, stock rights restructuring, and transfers of assets by enterprises with foreign investment has become an occasional phenomenon. The various restructuring activities of the businesses of enterprises with foreign investment have the characteristics of covering a wide range of taxation, being applicable to more laws and regulations on taxes, and difficult handling. With the primary aim of regulating the treatment of income tax in all varieties of the restructuring of the businesses of enterprises with foreign investment, we have promulgated the Provisional Regulations on the Treatment of Income Tax in the Restructuring of Businesses such as Mergers, Divisions, Stock Right Restructuring, and Transfers of Assets by Enterprises with Foreign Investment (hereinafter referred to as the Regulations). We hereby issue them to you. Please abide by them and implement them accordingly.

The Circular of the State Administration of Taxation on Several Issues Concerning Tax Policies Involving Foreign Countries on Enterprises Under the Experimental Shareholding System(Guo Shui Fa [1993] No. 139)shall be abolished from the date of the implementation of these Regulations. Where tax treatments of the reorganization of businesses of the shareholding system has been carried out in accordance with the Circular Guo Shui Fa [1993] No. 139 prior to the implementation of these Regulations, no adjustment shall be made. Otherwise, adjustments shall be made in accordance with Article 7 of these Regulations.

Appendix:
Interim Provisions on the Treatment of Income Tax on the Restructuring of Businesses such as Mergers, Divisions, Stock Right Restructuring, and Transfers of Assets by Enterprises with Foreign Investment

In accordance with the relevant provisions of the Income Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises (hereinafter referred to as the Taxation Law) and the Detailed Rules for Its Implementation, the provisions on the issues of tax treatments regarding the continued existence identification of business activities, assets valuation, tax preferences, and the carry-over of losses during the restructuring of businesses such as mergers, divisions, stock rights restructuring and transfers of assets by enterprises with foreign investment (hereinafter referred to as Enterprises) are hereby stipulated as follows:

I. Tax treatments of merger
The term "merger" as used herein refers to the action in which two or more enterprises merge into one enterprise in accordance with the provisions of the relevant laws and regulations. In situations where a new enterprise is jointly established by each original party of the merger, but each original party of the merger makes a dismissal, the merger shall be referred to as a merger by consolidation (or a merger by dissolution). In situations where an enterprise accepting other enterprises continues to exist while the accepted enterprises will be dismissed, the merger shall be referred to as a merger by absorption (or by continued existence). No matter what form of merger is undertaken by an enterprise, the liquidation procedures need not necessarily be carried out. The shareholders (or investors) of enterprises prior to the merger, excluding those asking for the withdrawal of their shares, shall become the shareholders of the merged enterprise. The rights of the creditors and indebtedness of each of the merging parties occurring prior to the merger must be assumed by the merged enterprise in accordance with the procedures as stipulated by the relevant laws.
During tax treatments, the business activities of an enterprise prior to and after the merger shall be regarded as continued business activities. If a merged enterprise is still an enterprise with foreign investment identified in accordance with the relevant laws, the tax treatments shall be carried out in accordance with the following provisions:
1. Tax treatments of assets valuation
The assets, liabilities, and equity of the shareholders of the merged enterprise shall be valued according to the historical book cost of the enterprises prior to the merger. The original book value of the enterprise may not be adjusted by the evaluated value of relevant items such as assets for the purpose of pursuing a merger. During the accounting of the profits and losses of the merged enterprise, if the book value of the relevant assets is adjusted by the evaluated value and calculation and deduction of depreciation or amortization are carried out accordingly, one of the following measures must be adopted during the calculation of the annual taxable income:
(1) Adjustment by year. The amount of current costs and expenses, which has been over counted or undercounted in the manner of depreciation and amortization during each tax year due to changes in the value of assets shall be adjusted in the items of cost and expense to be used in the annual tax declaration by increasing or decreasing the corresponding amount in current taxable income.
(2) Aggregate adjustment. The changed amount of the value of assets shall be averaged by ten years regardless of the items of the assets and shall be adjusted in the items of cost and expense to be used in the annual tax declaration by increasing or decreasing the same amount in the taxable income of each tax year.
The above adjustment measures shall be chosen by the enterprise by applying and submitting a request to the competent tax authorities for approval. The relevant calculating data shall be submitted to the competent tax authorities for examination when enterprises undergo the formalities of annual tax declaration.
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