Meaning
Tax regulations promulgated by the Ministry of Finance and the State Taxation Administration of China govern the corporate restructuring of enterprise income tax for domestic and foreign transactions. Known as the Circular 59 Rules, these guidelines establish the strict requirements for tax-deferred treatments during corporate mergers, acquisitions, and equity divisions. The regulatory framework defines the distinction between special tax treatments and general tax treatments, forcing enterprises to meet high asset and equity transfer thresholds to qualify for tax relief.
Deferred Treatment
Filing requirements mandate that corporate restructurings satisfy five cumulative conditions to defer taxable gains. Under the Circular 59 Rules, the transaction must possess a reasonable commercial purpose and not aim primarily at tax avoidance. Eligible transactions must also maintain equity consistency for a designated period post-merger.
Restructuring Requirement
Equity consideration ratios determine the level of tax deferral permitted during corporate reorganization. The Circular 59 Rules specify that the acquiring enterprise must pay at least eighty-five percent of the total consideration in its own shares. If cash payments exceed fifteen percent of the transaction value, the entire deal faces immediate capital gains taxation.
Tax Valuation
Tax authorities closely monitor cross-border reorganizations to prevent assets from leaving the domestic tax net without valuation adjustments. Restructurings that involve transferring shares of domestic firms to offshore entities receive intense scrutiny under the Circular 59 Rules. Foreign parent companies must document the tax basis of transferred assets to avoid severe retroactive tax assessments.
