China: China Clarifies Tax Rules for Enterprise Reorganizations

Last Updated: 20 August 2010
Article by Fuli Cao

On April 30, 2009, the Ministry of Finance and the State Administration of Taxation (the "SAT") jointly issued the Notice on Certain Issues of Corporate Income Tax Treatment of Enterprise Reorganizations (the "Notice"), Cai Shui (2009) No. 59. The Notice provides corporate income tax treatment of various types of reorganizations including debt restructurings, acquisitions of equity, acquisitions of assets, mergers, and de-mergers. On July 26, 2010, the SAT issued the Measures on Administration of Corporate Income Tax Concerning Enterprise Reorganizations (the "Measures"), SAT Public Notice [2010] No. 4. The Measures are implemented from January 1, 2010, and they have clarified some tax rules provided in the Notice and set forth guidance for documentation and filings for reorganization. This Commentary outlines a few of the clarifications.

Date of Reorganization

A gain or loss generally is recognized on the date of reorganization in an ordinary (taxable) reorganization. For a special (tax-free) reorganization, the date of reorganization determines the time of reporting for the reorganization. According to the Measures, the date of reorganization is:

  • The effective date of the debt restructuring agreement, for debt restructurings.
  • The date that the share transfer agreement is effective and the registration of ownership change has been completed, for share acquisitions.
  • The date that the asset purchase agreement is effective and the actual closing has taken place, for asset acquisitions.
  • The date that the surviving enterprise has obtained the ownership of the assets of the merged enterprise and the business registration has been completed, for mergers.

The date that the spin-off enterprise has obtained the ownership of the assets of the de-merged enterprise and the business registration has been completed, for de-mergers.

Valuation of Assets or Shares Transferred

If an enterprise acquires the assets or shares of another enterprise in a special reorganization, the parties should submit to the tax authorities a valuation report issued by a PRC-licensed appraiser with respect to the fair market value of the assets or shares acquired. This valuation report is also required for a taxable merger and de-merger.

For an acquisition of assets or shares in a taxable reorganization, the parties are required to have valid evidence of the fair market value of assets or shares transferred. The Measures do not specify what constitutes "valid evidence." It appears that the valuation report is not a must; however, we recommend that such report be prepared for related party transfers whose price is not available in the market. While the taxpayer is not required to submit this evidence to the tax authorities, it must be available for their inspection.

Business Purpose

A bona fide business purpose is required for all special reorganizations. According to the Measures, when an enterprise makes filings for a special reorganization, it should explain the business purpose in the following areas:

  • The method of reorganization. The enterprise should specify the forms of reorganization, the background of the transaction, the time of the transaction, and the operation models before and after the reorganization.
  • Form and substance. The enterprise should explain the legal right and obligation as a result of the reorganization as well as the final actual and commercial result of the transaction.
  • The possible changes of tax status of parties to the reorganization as a result of the transaction.
  • The changes of financial status of parties to the reorganization as a result of the transaction.
  • Whether the reorganization results in any economic benefits or potential obligations to the parties that otherwise would not be obtained under free market principle.
  • The information of nonresidents' participation in the reorganization.

Limitation on Use of Net Operating Losses in Mergers

For a merger in a special reorganization, the Notice provides a limitation on the use of loss carryovers of a merged enterprise by a surviving enterprise. The limitation is an amount equal to the fair market value of the net assets of the merged enterprise, multiplied by the interest rate of the longest-term treasury bond that has been issued by the end of the year in which the merger takes place. The Measures clarify that this is an annual limitation and that the surviving enterprise can use the tax loss carryovers of the merged enterprise up to the limitation amount each year for the remaining loss carryover period of such losses.

Filing and Confirmation

The Measures clarify the filing requirements, including specific documents for each type of reorganization. If a reorganization is elected to be treated as a special reorganization, all parties to the reorganization must take the same elected position. If the parties need a confirmation from the tax authorities on the special reorganization treatment, the parties may have the lead party file an application for the confirmation with the tax bureau in charge; the tax bureau should then forward the application to the provincial level of tax bureau for the confirmation. If the lead party and other parties are not in the same province, municipality, or autonomous region, the provincial tax authority in charge of the lead party should send a copy of the application materials to the relevant tax authorities in the other province, municipality, or autonomous region. The lead party in a special reorganization is the debtor in a debt restructuring, the transferor in a share or asset acquisition, the surviving enterprise in a merger by absorption, the enterprise that owned majority assets in a merger where the surviving company is a newly established enterprise, or the de-merged or spin-off enterprise in a de-merger.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.