China: China’s First Taxation Policies On Asset-Backed Securities Released

In March 2005, China kicked off the experiment on securitization of credit assets, which allowed banks to sell their credit assets through issuing the securities in the capital market for refinancing. It was regarded as an important step in China’s financial reforms with the aim of optimizing banks’ structure of asset and liabilities and promoting financial innovation. The related products are referred as asset-backed securities (ABS).

However, the tax policies related to the assets’ securitization have remained unclear until March 2006, when the PRC State Administration on Taxation (SAT) issued a circular (Caishui (2006), No5), which laid down the taxation framework for asset securitization in the banking sector. The relevant taxation policies are as follows.

The initiator of an ABS product and the trustee of the securities are generally exempt from stamp duty when selling and managing the product.

The exempted documents mainly include:

• the agreement on assignment of credit assets from the initiator to the trustee;
• the trustee management agreement;
• the various agreements executed by the initiator or trustee with the custodian, the central clearing registration house and other securitization service providers involved at various stages of the securitization process;
• securities sale documents executed by the trustee;
• the investor’s sale and purchase contracts of asset-backed securities; and
• the accounting books established by the initiator or trustee related to the bookkeeping of the securitization transaction.

The exemption scope is quite broad which shall reduce the related transaction costs substantially.

The relevant business tax policies are as follows:

• The financial institutions operating the ABS products in various capacities, such as trustee of the ABS, initiator of the ABS are subject to BT in respect of the gain derived from selling ABS products and the various service charges received.
• The BT exemption is only granted to the non-financial institutional investors in respect of the gain on disposal of ABS products.

The relevant income tax policies are as follows:

• The income derived from the ABS project that is distributed to institutional investors in the current year is exempt from income tax while the portion that is not distributed to institutional investors in the current year is taxable.
• Full consideration needs to be made to avoid dual tax collection and increasing the tax burden of all parties in the securitization programme.

Overall, this first tax policy is quite generous. It is viewed as a positive policy direction to encourage the development of asset-backed securities in China.

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