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Special tax treatments for mergers and spin-off transactions
Welcome again to our News Flash series covering the newly promulgated tax rules for corporate tax restructuring ("Restructuring Tax Rules"). In the previous News Flash Issue 10, Issue 11 and Issue 15, we reported the key features and observations on the Restructuring Tax Rules and also discussed the special tax treatments for equity and asset acquisitions.
In this issue, we will focus on the special tax treatments for merger and spin-off transactions. In particular, we will discuss the salient points on the treatments of tax loss and tax incentives of the pre-merger enterprises and pre-spin-off enterprises upon merger and spin-off respectively.
The discussions below are based on our interpretation of the relevant provisions in the Restructuring Tax Rules and preliminary explanation from the Chinese authorities. It is imperative to note that the Restructuring Tax Rules are extremely complicated. It is possible that the Chinese authorities may come up with further official clarifications or even make changes to some articles from time to time which may be different from our interpretation and their preliminary explanation.
In this issue, we look at the following topics:
- Mergers qualifying for special tax treatments
- Brought forward of tax loss and tax incentives on mergers
- Spin-off qualifying for special tax treatments
- Illustration of special tax treatments
- Illustration of general tax treatments
- Brought forward of tax loss and tax incentives on spin-offs
- PwC observations
- Whether foreign investors can conduct cross-border mergers and spin-off on special tax treatments basis is still uncertain;
- Multiple steps transfer is feasible;
- Limited tax benefits can be achieved under mergers and spin-off transactions;
- Using a tax loss company to merge a profitable company by absorption;
- Determination of the fair value under merger and spin-off transactions;
- Investors should be aware of inheriting hidden tax liability after conducting merger and spin-off; and
- Uncertainties on vertical merger and drop-down spin-off.
Conclusion
The Restructuring Tax Rules lay down the criteria for investors to obtain tax deferral benefits under mergers and spin-off transactions. They also provide explanations on how the tax loss and tax incentives should be treated. However, there are still a number of unclear issues that need to be clarified. It is unrealistic for the Restructuring Tax Rules to address all types of mergers and spin-off transactions, each of which has its own characteristics. At this stage, different local-level tax bureaus may have different interpretations on how the provisions in the Restructuring Tax Rules should apply. More clarifications will be provided when investors, professional bodies and the tax authorities gain more practical experience on merger and spin-off transactions in China.
As mentioned, each merger and spin-off transaction has its own characteristics. Investors should perform a detailed analysis of the tax implications on the shareholders, pre-merger / spin-off enterprises as well as the surviving enterprises after the merger / spin-off with specific reference to their case before deciding on whether to opt for special tax treatments.
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Read more by downloading our China Tax/Business News Flash (Jun 2009, Issue 16) (pdf file, 264KB) for your reference.
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