Meaning
Taxation regulation governs the tax treatment of corporate restructurings, mergers, and spin-offs in China by establishing the criteria for tax-free treatment. This circular 59, jointly issued by the Ministry of Finance and the State Administration of Taxation, allows qualifying restructurings to defer enterprise income tax liabilities if they meet specific transaction structures. The regulation applies exclusively to restructurings where the equity payment ratio and the business continuity requirements are strictly satisfied.
Restructuring Requirement
Special tax treatment is available only when the equity payment is at least eighty-five percent of the total consideration. In addition, the transaction must have a reasonable commercial purpose and not be designed primarily to reduce or avoid tax. These conditions prevent companies from using restructurings as artificial tax shields.
Tax Treatment
Under general tax treatment, the transfer of assets or equity is treated as a sale at fair market value, triggering immediate tax on any gain. Choosing the special tax treatment under the rules of circular 59 allows the tax basis of the transferred assets to be carried over to the receiving entity. This carry-over basis delays the recognition of tax until a subsequent taxable transaction occurs.
Administrative Approval
Filings for special tax treatment must be submitted to the local tax bureau within thirty days of the restructuring contract taking effect. Failure to submit complete documentation can result in the transaction being reclassified as subject to immediate taxation. Local tax authorities scrutinize these filings closely to verify compliance with both national and regional guidelines.
