1/24/2014
China’s State Administration of Taxation (SAT) issued guidance on 12 December 2013 (Bulletin 72) that addresses the tax
treatment of “special reorganizations” carried out by a nonresident entity. Two types of share transfers are affected:
A nonresident’s transfer of the shares of a resident enterprise to the nonresident’s wholly-owned nonresident
enterprise (foreign-to-foreign transfer); and
A nonresident’s transfer of the shares of a resident enterprise to the nonresident’s wholly-owned resident
enterprise (foreign-to-domestic transfer).
Under China’s merger and acquisition tax rules (as set out in Circular 59), a reorganization can be considered an ordinary
reorganization or a special reorganization. An ordinary reorganization is taxed under the normal enterprise income tax rules
governing the transfer of assets, i.e. any taxable gain or loss is recognized at the time of the transaction. By contrast, a
special reorganization is a tax-free transaction under which gain or loss on the transfer of shares or assets is deferred,
provided certain conditions are satisfied. To apply for special reorganization treatment, the transaction must be reported
(along with documentation) to the competent tax authorities for review.
Bulletin 72 aims to clarify and streamline the review procedure for reorganizations qualifying for special tax treatment. The
bulletin generally applies as from the date of issuance, although it also applies to transactions entered into before 12
December where the tax treatment of the transaction has not yet been finalized.
Bulletin 72 provides as follows:
A nonresident enterprise that seeks to apply the special tax treatment to a share transfer must report the transfer
to the relevant tax authorities within 30 days of the effective date of the relevant contract or agreement or the
completed change in business registration of the PRC enterprise, whichever is later. (Previously, the reporting
deadline for a nonresident enterprise transferor was not clearly set in the regulations).
Where special reorganization treatment is applied in a foreign-to-foreign transfer and the transferor and transferee
enterprises are tax residents of different jurisdictions and, following the transaction, the undistributed profits of the
transferred enterprise are distributed to the transferee, any preferential dividend withholding tax rate under an
applicable tax treaty will not apply to the subsequent distribution of the undistributed profits. Information relating
to the undistributed profits of the transferred enterprise at the time of the transfer must be provided to the
competent tax authorities when the transaction is reported.
The requirement that approval of the provincial tax authorities be obtained for special reorganization tax treatment
is abolished. However, the responsible lower-level tax authorities must review all reported transfers and issue a
decision on eligibility for special reorganization tax treatment to the relevant provincial tax authorities, generally
within 30 business days of the completion of the reporting requirement. In a foreign-to-domestic share transfer,
the provincial tax authorities in charge of the transferee enterprise must report on eligibility for special
reorganization tax treatment to the relevant provincial tax authorities of the transferred enterprise within 30 days
of receiving the report of the lower-level tax authorities of the transferee enterprise. The SAT also has asked all
provincial tax authorities to annually report the information in respect of share transfers by nonresident enterprises World Tax Advisor Page 6 of 21 Copyright ©2014, Deloitte Global Services Limited.
24 January 2014 All rights reserved.
(i.e. the number of ordinary/special reorganizations, the amount of tax collected under ordinary reorganizations)
that they have handled to the SAT.
The transfer of the shares of a Chinese resident enterprise as a result of a split or merger of a foreign enterprise is
covered by the “foreign-to-foreign transfer” article in Circular 59, Article 7(1). For example, a transfer of the shares
of a Chinese resident company resulting from a merger of its nonresident parent company with the parent’s
wholly-owned nonresident subsidiary (i.e. a downstream merger) still is considered a foreign-to-foreign transfer,
and special reorganization treatment may be applied if certain conditions are satisfied.
The SAT’s efforts to clarify and internally streamline the review procedure for special reorganization tax treatment are
welcome, although for taxpayers seeking advance confirmation that a share transfer would qualify for special treatment,
Bulletin 72 is expected to have little impact. Cases that are in progress are expected to be delayed, as the relevant
authorities consider the specific requirements of Bulletin 72.
Taxpayers that are proposing to undertake, or that have undertaken transfers without making the required reporting now
must do so, or the transfer will not be eligible for special reorganization tax treatment.
Courtesy of Deloitte Touche
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